How is interest coverage ratio impacted if a company acquires inventory through cash payments?

How is interest coverage ratio impacted if a company acquires inventory through cash payments?

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1)Sometimes called the coverage ratio, this ratio measures the risk that interest payments will not be...

How can the company increases it's interest coverage ratio ? Explain

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1.The interest-coverage ratio is calculated as a) net income + taxes – interest - depreciation) ÷...

Through the payment of $12,377,000 in cash, Drexel Company acquires voting control over Young Company. This...

Through the payment of $11,525,000 in cash, Drexel Company acquires voting control over Young Company. This...

Pepitone Company acquires an 80% interest in Spahn Company for $400,000 cash on January 1, 2018....

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ekkarill92 answered 2 years ago

1)Sometimes called the coverage ratio, this ratio measures the risk that interest payments will not be made if earnings decrease. a. Number of days' sales in inventory b. Times interest earned ratio c. Ratio of fixed assets to long-term liabilities d. Ratio of liabilities to stockholders' equity 2)The balance sheets at the end of each of the first two years of a company's operations indicate the following: Year 2 Year 1 Total current assets $600,000 $580,000 Total investments 80,000 40,000...

Compute and compare current cash debt coverage, current debt coverage ratio, and free cash flow for Pepsico and Dr. Pepper/ Snapple. Please use the links below for Pepsico and Dr. Pepper/Snapple's financial statements https://finance.yahoo.com/quote/PEP/financials?p=PEP https://finance.yahoo.com/quote/DPS/financials?p=DPS

1.The interest-coverage ratio is calculated as a) net income + taxes – interest - depreciation) ÷ interest. b) (net income – taxes – interest – depreciation) ÷ interest. c) net income + taxes + interest + depreciation) ÷ interest. d) net income + interest + depreciation) ÷ interest. 2. All of the following transactions lead to temporary timing differences except a) the use of straight-line depreciation of accounting purposes. b) the recognition of dividend income for dividends received from another...

Through the payment of $12,377,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 110,000 outstanding common shares ($50 par value) as well as all 10,000 shares of 7 percent, cumulative, $100 par value preferred stock. Of the total payment, $3.8 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2021, when Young reports...

Through the payment of $11,525,000 in cash, Drexel Company acquires voting control over Young Company. This price is paid for 60 percent of the subsidiary's 100,000 outstanding common shares ($40 par value) as well as all 17,500 shares of 6 percent, cumulative, $120 par value preferred stock. Of the total payment, $3.5 million is attributed to the fully participating preferred stock with the remainder paid for the common. This acquisition is carried out on January 1, 2018, when Young reports...

Pepitone Company acquires an 80% interest in Spahn Company for $400,000 cash on January 1, 2018. On that date, Spahn’s equipment (remaining economic life of 5 years) is undervalued by $50,000; any remaining excess of cost over book value is attributed to goodwill. Spahn’s balance sheet on the date of the purchase is as follows: Assets Liabilities and Equity Cash $ 60,000 Current liabilities $ 60,000 Inventory 60,000 Long-term liabilities 80,000 Property, plant and equip. 600,000 Common Stock (no par)...

Interest Coverage Ratio is the ratio between the Company's Earning Before Interest (EBIT) and Taxes and Interest. It is calculated by dividing the Company's EBIT by Company's Interest expense. It determines the Company's ability to pay its interest payment obligation. A higher interest coverage ratio is good.

If the inventory is purchased through cash payment, then the interest coverage ratio will be higher. This can better be understood with as example.

Suppose a Company has an EBIT of $1000 and the interest payment of $600 which includes interest payment of $100 for debt taken for purchase of inventory. Then Interest Coverage Ratio will be [$1000/$600] which is equal to 1.67 times.

But now suppose the inventory is purchased through cash payment, then the interest payment will be $500 and the interest coverage ratio will be [$1000/$500] which is equal to 2 times.

Hence, from the above discussion it can be observed that the interest coverage ration will be higher if the inventory is purchased through cash payment.