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    TamzR's Avatar
    TamzR Posts: 3, Reputation: 1
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    #1

    May 2, 2009, 10:32 AM
    Computing Taxable Income and Cash Coverage Ratio
    A firm has net income of $390, interest expense of $40 and depreciation of $50. The corporate tax rate is 35 percent. What is the Cash Coverage Ratio?

    a)9.75
    b)10.67
    c)11.00
    d)14.41
    e)17.25

    My Attempt to the Question
    Cash Coverage Ratio = (EBIT + Depreciation)/ Interest

    EBIT = 390*35% = 526.50
    Cash Coverage Ratio = (526.50+50)/40 = 14.41

    Can you explain to me if my approach was correct and help me understand the correct way to approach this kind of question.
    Thanks In Advance
    Zazonker's Avatar
    Zazonker Posts: 126, Reputation: 19
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    #2

    May 2, 2009, 01:12 PM

    OK, but I think there are a couple of problems with your calculation of EBIT.
    1. Taxes are on the net income before taxes. At a tax rate of 35%, this would be calculated as (Net Income)/(1 - tax rate).
    2. To calculate EBIT, you also need to add the interest expense back in.
    If you make those changes, you'll get a different answer.
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