A firm has EBIT of $400,000 and depreciation expense of $20,000. Fixed charges total $50,000. Interest expense totals $7,000. What is the firm's fixed-charge coverage ratio?

The firm's fixed-charge coverage ratio is 7.89 times

Explanation:

Fixed charge coverage ratio : This ratio deals with fixed payments like: interest payments, lease payments which is before earning before income and taxes.

The formula to compute the fixed charge coverage ratio is shown below:

= (EBIT + Fixed charges) : (Fixed charges + interest expense)

= ($400,000 + $50,000) : ($50,000 + $7,000)

= $450,000 : $57,000

= 7.89 times

The total of fixed charge include depreciation expense also. Thus it would not be taken into computation part.

Hence, the firm's fixed-charge coverage ratio is 7.89 times