Final answer:
To find Chutes' interest coverage ratio, we calculate its EBIT by multiplying the operating margin by the total sales. Then, we divide EBIT by the interest expense to get the interest coverage ratio. Chutes' interest coverage ratio is 3.20, indicating that the company can cover its interest expense 3.20 times with its EBIT.
Step-by-step explanation:
The interest coverage ratio is a measure of a company's ability to meet its interest payments on its outstanding debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. To find Chutes' interest coverage ratio, we need to calculate its EBIT first. The formula for EBIT is:
EBIT = Operating Margin * Total Sales
Given that Chutes' operating margin is 11.5% and its total sales are $30.3 million, we can calculate:
EBIT = 0.115 * $30.3 million = $3.49 million
Now, we can calculate the interest coverage ratio using the formula:
Interest Coverage Ratio = EBIT / Interest Expense
Given that Chutes' interest expense is $1.09 million, we can calculate:
Interest Coverage Ratio = $3.49 million / $1.09 million = 3.20
Therefore, Chutes' interest coverage ratio is 3.20, indicating that the company is able to cover its interest expense 3.20 times with its EBIT.