Question

A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio?

Answer 1

7.09 times

Step-by-step explanation:

Cash coverage ratio is the total cash flow from operating activities divided by the total charges (fixed and interest). Here, interest expense and depreciation expense are included in the fixed charges as interest expense is a fixed expense for a company.

We know, cash coverage ratio =
`(Cash flow from operating activities)/(Fixed charges)`

Given,

EBIT = $300,000

Depreciation expense = $12,000

Fixed expense = $44,000

Interest expense = $7,000

Now, cash flow from operating activities = EBIT + Depreciation + Changes in working capital (indirect method)

cash flow from operating activities = $300,000 + 12,000 = $312,000

Putting the value in the formula, we can get,

cash coverage ratio =
`(312,000)/(44,000)`

cash coverage ratio = 7.09 times