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) )