Problem 4-18 Leverage Ratios (LO3) Lever Age pays an 8% rate of interest on $10

Question

Problem 4-18 Leverage Ratios (LO3)

Lever Age pays an 8% rate of interest on $10 million of outstanding debt with face value $10 million. The firm’s EBIT was $1 million.

a.

What is times interest earned? (Round your answer to 2 decimal places.)

  Times interest earned

b.

If depreciation is $200,000, what is cash coverage? (Round your answer to 2 decimal place.)

  Cash coverage

c.

If the firm must retire $300,000 of debt for the sinking fund each year, what is its “fixed-payment cash-coverage ratio” (the ratio of cash flow to interest plus other fixed debt payments)? (Round your answer to 2 decimal places.)

  Fixed-payment cash-coverage ratio

Lever Age pays an 8% rate of interest on $10 million of outstanding debt with face value $10 million. The firm’s EBIT was $1 million.

Explanation / Answer

Times interest earned = earning before interest and taxes / Interest expense

= 1000000/800000 i.e 1.25 times

Cash coverage Ratio = Earning before interest and taxes + Non Cash expense / Interest Expense

= (1000000+200000)/800000 i.e 1.5 times

Fixed Payment Cash coverage ratio = EBIT + Fixed Charge/ Interest + Fixed Charge

= 1000000+300000/800000+300000

= 1.1818 times

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