Rosita's Resources paid $250 in interest and $130 in dividends last year. The times interest earned ratio is 3.8 and the depreciation expense is $80. What is the value of the cash coverage ratio?
A) 2.71
B) 3.64
C) 4.12
D) 5.78
E) 6.10

Question

Quizplus · Accepted Answer

Cash coverage ratio = (EBIT + Depreciation) / Interest Expense

From the times interest earned (TIE) ratio formula, we know that:

TIE = EBIT / Interest Expense

Rearranging the formula gives us:

EBIT = TIE x Interest Expense

Therefore:

Cash coverage ratio = (TIE x Interest Expense + Depreciation) / Interest Expense
                         = TIE + (Depreciation / Interest Expense)
                         = 3.8 + (80 / 250)
                         = 4.12

Therefore, the answer is C.

Rosita's Resources Paid $250 in Interest and $130 in Dividends