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30 June, 11:00

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?

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  1. 30 June, 14:45
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    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
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Home » Business » 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?
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