Question

A firm has EBIT of $400,000 and depreciation expense of $24,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio?

Answer 1

Firm's cash coverage ratio = 9.64

Step-by-step explanation:

We know,

Cash coverage ratio = Cash and Cash equivalents ÷ current liabilities

However, as there is no such information regarding cash and cash equivalents and liabilities, we have to use alternative formula,

Firm's cash coverage ratio = (EBIT + Depreciation Expense) ÷ Fixed charges

Given,

EBIT = $400,000

Depreciation Expense = $24,000

Fixed charges = $44,000

Therefore,

Firm's cash coverage ratio = ($400,000 + 24,000) ÷ $44,000

Firm's cash coverage ratio = $424,000 ÷ $44,000

Firm's cash coverage ratio = 9.64