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Ugh Inc.’s net income for the most recent year was $15,685. The tax rate was 35...

Ugh Inc.’s net income for the most recent year was $15,685. The tax rate was 35 percent. The firm paid $3,856 in total interest expense and deducted $2,535 in depreciation expense. What was the cash coverage ratio for the year?

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Expert Solution

Solution:

The formula for calculating the cash coverage ratio is

= ( EBIT + Non cash expenses ) / Fixed expenses

As per the information given in the question we have

Net Income after taxes = $ 15,685

Non Cash Expenses = Depreciation = $ 2,535

Fixed Expenses = Interest Expenses = $ 3,856

Tax rate = 35 % = 0.35

Calculation of EBIT:

a.We know that

Income before taxes * ( 1 – Tax rate ) = Net Income after taxes

Applying the available information we have

Income before taxes * ( 1 – 0.35 ) = $ 15,685

Income before taxes * 0.65 = $ 15,685

Income before taxes = $ 15,685 / 0.65 = $ 24,130.7692

b.We know that

EBIT = Income before taxes + Interest expense

Applying the available information we have

= $ 24,130.7692 + $ 3,856

= $ 27,986.7692

Thus we have EBIT = $ 27,986.7692

Applying the above values in the formula we have

= ( $ 27,986.7692 + $ 2,535 ) / $ 3,856

= $ 30,521.7692 / $ 3,856

= 7.9154

= 7.92 times ( when rounded off to two decimal places )

Thus the firm’s cash coverage ratio for the year = 7.92 times.

jeff jeffy answered 1 year ago

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