A firm has sales of $215,600, costs of $124,800, interest paid of $3,600, and depreciation of $11,400. the tax rate is 34 percent. what is the value of the cash coverage ratio?

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alexmarche7882 alexmarche7882

06-09-2018
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A firm has sales of $215,600, costs of $124,800, interest paid of $3,600, and depreciation of $11,400. the tax rate is 34 percent. what is the value of the cash coverage ratio?

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JuliettaGlassford JuliettaGlassford · Answer 1 · 2018-09-19T19:23:01+02:00

Cash Coverage ratio indicates if a firm has enough cash to pay of its interest expenses. The ideal ratio to be maintained by a firm is 1:1. This can be given by the following formula:

Cash Coverage Ratio=[tex]\frac{Earnings before Interest and Tax+Depreciation }{Interest Expense}[/tex]

Cash Coverage Ratio=[tex]\frac{215600-124800+11400}{3600}[/tex]

Cash Coverage Ratio=28.38

Assumption: Cost includes Depreciation, thus depreciation is added back, To find Cash Profits before Interest and Taxes.