Question

Delectable Turnip, Inc.'s, net income for the most recent year was $9,212. The tax rate was 40 percent. The firm paid $3,912 in total interest expense and deducted $5,023 in depreciation expense.

Required :
What was the company's cash coverage ratio for the year?

Answer 1

The cash coverage ratio measures a company's ability to meet its debt obligations using its operating cash flow. To calculate it, we need to determine the operating cash flow by adding the net income and non-cash expenses like depreciation. The cash coverage ratio for Delectable Turnip, Inc. is approximately 3.64.

Step-by-step explanation:

The cash coverage ratio measures a company's ability to meet its debt obligations using its operating cash flow. It is calculated by dividing the operating cash flow by the total debt service (interest expense plus principal repayments). To calculate the company's cash coverage ratio, we need to determine the operating cash flow.

Operating cash flow = Net income + non-cash expenses (depreciation)

In this case, the net income is $9,212 and the depreciation expense is $5,023. Therefore, the operating cash flow is $14,235 ($9,212 + $5,023).

The total debt service is the sum of interest expense and principal repayments. Since the question only provides information about the interest expense ($3,912), we will assume there were no principal repayments, so the total debt service is also $3,912.

Now, we can calculate the cash coverage ratio:

Cash coverage ratio = Operating cash flow / Total debt service

Cash coverage ratio = $14,235 / $3,912

Cash coverage ratio ≈ 3.64