contestada

Pop evil, inc.'s net income for the most recent year was $16,802. The tax rate was 21 percent. The firm paid $3,706 in total interest expense and deducted $4,491 in depreciation expense. What was the cash coverage ratio for the year?

Respuesta :

In order to find Cash coverage ratio, Earnings before Interest and Tax will be required to be found. Thus We shall calculate Income Before tax First. The below logic needs to be Understood:

If Income before tax is 100, Income after tax will be 100-21=79, Thus if Net Income is 79, Earnings before tax will be calculated as below:

Earnings before tax=16802*[tex]\frac{100}{79}[/tex]

Earnings before tax=$21268

EBIT= Earnings Before Tax+Interest Expense

EBIT=21268+3706

EBIT=$24974

Cash Coverage Ratio=[tex]\frac{EBIT+Depreciation}{Interest Expense}[/tex]

Cash Coverage Ratio=[tex]\frac{24974+4491}{3706}[/tex]

Cash Coverage Ratio=7.95


dubeyshailja64

The cash coverage ratio for the year will be 7.95. The formula to calculate cash coverage ratio is:

[tex]\rm Cash Coverage Ratio = \dfrac{EBIT + Depreciation}{Interest \:Expense}[/tex] ,

where EBIT is Earnings before Interest and tax.

Cash Coverage Ratio

Cash coverage ratio is used to determine a business' ability to pay off its liability with available cash. It determines the liquidity of a business. The cash coverage ratio should be greater than 1:1.

To calculate cash coverage ratio of Pop Evil Inc. following calculations are required:

Given:

[tex]\begin{aligned} \rm Net Income &= \$16,802\\\\\rm Tax\: Rate &= 21\%\\\\\rm Interest\: Expense &= \$3,706\\\\\rm Depreciation\: Expense &= \$4,491\end[/tex]

Calculation of EBIT:

Since the given tax rate is 21%, net income will be equal to 100 - 21 = 79%.

[tex]\rm EBT = Net Profit\:X\:\dfrac{100}{79} \\\\\rm EBT = \$16,802\: X\: \dfrac{100}{79} \\\\\rm EBT = \$21,268.35[/tex]

EBT refers to Earnings before tax. To calculate EBIT interest expense should be added to EBT:

[tex]\rm EBIT = EBT + Interest\\\\EBIT = \$21,268 + \$3,706\\\\EBIT = \$24,974[/tex]

The Cash coverage ratio will be:

[tex]\begin{aligned} \rm Cash\; Coverage \:Ratio &= \dfrac{EBIT + Depreciation}{Interest \:Expense}\\\\&=\dfrac{\$24,974+\$4,491}{\$3,706}\\\\&=\dfrac{\$29,465}{\$3,706}\\\\&= 7.95\end[/tex]

Therefore the cash coverage ratio is 7.95:1.

Learn more about the topic here:

https://brainly.com/question/6396633

Otras preguntas