Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year.The times interest earned ratio is 2.9,the depreciation expense is $7,900,and the tax rate is 21 percent.What is the value of the cash coverage ratio?
A)3.71
B)2.58
C)3.60
D)2.78
E)3.10

Question

Quizplus · Accepted Answer

Cash coverage ratio = (EBIT + Depreciation) / Interest

We are given interest = $11,310 and depreciation = $7,900.
Also, times interest earned ratio = 2.9, which implies:

EBIT / Interest = 2.9
EBIT = 2.9 * Interest = 2.9 * 11,310 = $32,799

Substituting these values in the cash coverage ratio formula:

Cash coverage ratio = (EBIT + Depreciation) / Interest
= (32,799 + 7,900) / 11,310
= 40,699 / 11,310
= 3.60

Therefore, the value of the cash coverage ratio is 3.60, which is closest to option C (3.60).

Rosita's Resources Paid $11,310 in Interest and $16,500 in Dividends