The Docksider has net income for the most recent year of $24,650 and a combined tax rate of 24 percent. The firm paid $1,800 in total interest expense and deducted $2,900 in depreciation expense. What was the cash coverage ratio for the year?
A) 20.48 times
B) 11.48 times
C) 19.39 times
D) 20.63 times
E) 13.69 times

Question

Quizplus · Accepted Answer

The cash coverage ratio is calculated as (EBIT + Depreciation) / Interest. First, calculate EBIT: Net Income = (EBIT - Interest) * (1 - Tax Rate). Rearrange to find EBIT: EBIT = (Net Income / (1 - Tax Rate)) + Interest = ($24,650 / 0.76) + $1,800 = $34,421.05. Then, Cash Coverage Ratio = (EBIT + Depreciation) / Interest = ($34,421.05 + $2,900) / $1,800 = 20.63 times.

The Docksider Has Net Income for the Most Recent Year