19.2.2.b. Interest Coverage Ratio Formula

Try these first

1. 1.

   Calculate the Interest Coverage Ratio if EBIT is $250,000 and interest expense is$50,000.

   Hint

   Use the formula: EBIT divided by interest expense.

2. 2.

   What does an Interest Coverage Ratio of 1.2 indicate?

   Hint

   Think about whether earnings exceed interest expense.

3. 3.

   What is the formula for the Interest Coverage Ratio?

   Hint

   Remember the key components of the ratio.

4. 4.

   A higher Interest Coverage Ratio signifies what?

   • Higher risk of insolvency
   • Lower ability to pay interest
   • Greater ability to cover interest payments

   Hint

   Consider what a high ratio implies relative to obligations.

5. 5.

   A company's EBIT is $850,000, and its interest expenses are$400,000. Calculate the Interest Coverage Ratio and analyze its significance.

   Hint

   Break down EBIT in relative terms to interest payments.

6. 6.

   A tech firm has a considerable amount of debt with an EBIT of only $200,000 and interest payments of$300,000. Discuss the implications of these figures.

   Hint

   Evaluate how ongoing operations could be impacted.