Question

A firm has operating profit of $210,000 after deducting fixed lease payments of $30,000. The fixed interest expense is $50,000. What is the firm's fixed charge coverage ratio

Answer 1

Given:

Operating profit of $210,000 after deducting fixed lease payments of $30,000.

Fixed interest expense = $50,000.

To find:

The firm's fixed charge coverage ratio.

Step-by-step explanation:

The formula for fixed charge coverage ratio is

`\text{Fixed charge ratio}=\frac{\text{EBIT + Fixed lease payment}}{\text{Fixed interest + Fixed lease payment}}`

where, EBIT is earning before interest and tax.

`\text{Fixed charge ratio}=(210000+30000)/(50000+30000)`

`\text{Fixed charge ratio}=(240000)/(80000)`

`\text{Fixed charge ratio}=3`

Therefore, the firm's fixed charge coverage ratio is 3:1.