By NEAS - 7/8/2024 3:04:20 PM
FA Module 7 Interest coverage ratio practice exam questions
covering net revenue, lease expense, interest expense, net income, earnings before interest and taxes, interest coverage ratio, fixed charge coverage ratio
A firm’s effective tax rate is 10%, and its financial statements show
Net revenue 851
Lease expense 25
Interest expense 14
Net income 187
Question 7.1: Pre-tax income
What is pre-tax income?
Answer 7.1: 187 / (1 – 10%) = 207.78
(pre-tax income = net income / (1 – effective tax rate) )
Question 7.2: Earnings before interest and taxes
What are earnings before interest and taxes?
Answer 7.2: 207.78 + 14 = 221.78
(earnings before interest and taxes = pre-tax income + interest expense)
Question 7.3: Interest coverage ratio
What is the interest coverage ratio?
Answer 7.3: 221.78 / 14 = 15.841
(interest coverage ratio = earnings before interest and taxes / interest expense)
Question 7.4: Fixed charge coverage ratio
What is the fixed charge coverage ratio?
Answer 7.4: (221.78 + 25) / (14 + 25) = 6.328
(Fixed charge coverage ratio = (earnings before interest and taxes + other fixed charges) / (interest expense + other fixed charges) )
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