Flash In The Pan Cooking School is considering the issuance of additional long-term debt to finance expansion.At the present time the company has $160 million of 10% debentures outstanding.Its after-tax net income is $48 million, and the company's (marginal) income tax rate is 40%.The company is required by the debenture holders to maintain its coverage ratio at 4.0 or greater.Determine Flash's present coverage ratio.
A)3.33
B)2.78
C)5.00
D)6.00

Question

Quizplus · Accepted Answer

Solution: EBT = $48 million/(1 - 0.40) = $80 million
EBIT = EBT + I = $80 million + ($160 million × 0.10) = $96 million
Coverage Ratio = EBIT/I = $96 million/$16 million = 6.0 times

Flash in the Pan Cooking School Is Considering the Issuance