Driver Enterprises reports 2015 earnings before interest and taxes (EBIT) of $47

Question

Driver Enterprises reports 2015 earnings before interest and taxes (EBIT) of $470,754 and interest expense of $35,026. Included in its reported operating expenses for 2015 were operating lease expenses of $147,000. Based on footnote data and a discount rate of 8% you have already calculated the present value of the company's future operating lease obligations to be $710,775. Calculate the fixed charge coverage ratio after incorporating the impact of the operating leases using the 1/3-2/3 method. Present your answer rounded to two decimal places, e.g., 20.00.

Explanation / Answer

GIVEN THAT

Earning Before Interest And Taxes is = $470,574

Interest Expenses = $35,026

Operating lease Expenses =$147,000

Now we know that

Fixed Charge Coverage Ratio= {(EBIT+Fixed charges before taxes)/(Fixed charges before taxes+interest)}

Therefore FCCR= {(470,754+710,775)/(710,775+35,026)}=1.584

Hence Fixed charge coverage ratio for Driver Enterprises under the given conditions is 1.58

*The ratio is significant from lender's point of view. The higher the ratio the better it is.

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