Question

Lever Age pays an 8% rate of interest on $10 million of outstanding debt with face value $10 million. The firm’s EBIT was $1 million. (LO4-3) a. What is its times interest earned? b. If depreciation is $200,000, what is its cash coverage ratio?

Answer 1

Answer:

Times interest earned =1.25; Cash coverage ratio=1.5

Explanation:

Hi, we need to use the following 2 formulas in order to find the results above.

$Times Interest Earned=\frac{1000000}{800000}=1.25$

$Cash Coverage Ratio=\frac{1000000+200000}{800000}=1.5$

In the second formula, you can see an item called "non interest expenses", this means any expense that does not require a money outflow, this is typically the amortizations and the depreciations, since we only have depreciation, this is what we are going to use to get the cash coverage ratio. That is as follows.