Sales 440000 cost of goods sold 270000 interest paid 5500

Sales = $440,000, cost of goods sold = $270,000, interest paid = $55,000, net income = $42,000, tax rate = 30%. 1) What is the times interest earned ratio? 2) What is the cash coverage ratio? Please show all steps.

Solution

Suppose Earning before tax = x

Net income = X – (X* .30)

42000 = X - .30X

42000 = .7X

X = 60000

sales

440000

COGS

270000

gross profit

170000

Depreciation

55000

EBIT

115000

Interest expense

55000

EBT

60000

Tax @ 30%

18000

Net income

42000

First we have prepared income statement to find the value of depreciation expense and tax.

Now we can calculate easily the ratios,

Times interest earned = EBIT/ Interest

                                   = 115000/ 55000

                                 = 2.09 times

Cash coverage ratio = (Earnings Before Interest and Taxes + Non-Cash Expenses) ÷ Interest Expense

                                  = (115000 + 55000)/ 55000

                                 = 170000/ 55000 = 3.09 times