Heavy Load,Inc.has sales of $3,450,000,total assets of $1,240,000,and total liabilities of $275,000,which consist strictly of notes payable.The firm's operating profit margin is 16.1%,and it pays a 10% rate of interest on its notes payable.How much is the firm's interest coverage ratio?
A)15.6
B)45.3
C)20.2
D)3.0

Question

Quizplus · Accepted Answer

Interest Coverage Ratio = Operating Income / Interest Expense
Operating Income = Total Sales * Operating Profit Margin = $3,450,000 * 0.161 = $556,950
Interest Expense = Total Liabilities * Interest Rate = $275,000 * 0.10 = $27,500
Interest Coverage Ratio = $556,950 / $27,500 = 20.2