Question

Delectable Parsnip, Inc.'s, net income for the most recent year was $13.709. The tax rate was 24%. The firm paid $4,926 in total interest expense and deducted $5,371 in depreciation expense. What was the company's cash coverage ratio for the year?

Answer 1

The cash coverage ratio for Delectable Parsnip, Inc. is calculated by adding the net income, depreciation, and interest expense, then dividing by the interest expense. In this scenario, the cash coverage ratio is $24,006 / $4,926.

Step-by-step explanation:

The student is asking for the calculation of Delectable Parsnip, Inc.'s cash coverage ratio for the year. To find the cash coverage ratio, one would need to add back any non-cash expenses (such as depreciation) to the net income and then add the interest expense. The formula for the cash coverage ratio is (Net Income + Depreciation + Interest Expense) / Interest Expense.

Using the data provided:

• Net Income = $13,709
• Depreciation = $5,371
• Interest Expense = $4,926

First, calculate the earnings before interest and taxes (EBIT): EBIT = Net Income + Interest Expense + Depreciation = $13,709 + $4,926 + $5,371.

Then, the cash coverage ratio is calculated by dividing EBIT by Interest Expense:

Cash Coverage Ratio = EBIT / Interest Expense

Inserting the values:

Cash Coverage Ratio = ($13,709 + $4,926 + $5,371) / $4,926

Finally, compute the cash coverage ratio:

Cash Coverage Ratio = $24,006 / $4,926