The interest coverage ratio
A)indicates how many times a firm's net income will cover its interest expense and any principal payments that are due.
B)indicates how many times a firm's operating profit will cover its interest expense and any principal payments that are due.
C)indicates how many times a firm's operating profit will cover its interest expense.
D)indicates how many times a firm's net income will cover its interest expense.

Question

Quizplus · Accepted Answer

The interest coverage ratio indicates how many times a firm's operating profit will cover its interest expense. It doesn't take into account any principal payments due, only the interest expense. The interest coverage ratio measures a company's ability to pay its interest expense with its operating profit. Therefore, answer C, which specifies that the ratio measures how many times a firm's operating profit will cover its interest expense, is the correct choice. The ratio does not take into account any principal payments that are due, as stated in answers A and B. Answer D is incorrect because the ratio is based on operating profit, not net income.

The Interest Coverage Ratio