SEQ CHAPTER \h \r 1This statement of facts is presented for problems 22 and 23: The following data comes from Olde Towne Hospital's financial statements.Total revenues were $20 million.Total expenses were $18 million,consisting of patient care expenses - $13 million;administrative expenses - $2 million;depreciation - $2 million;and interest on long-term debt - $1 million.Principal payments on long-term debt were $1.5 million.
-What is Olde Towne's interest coverage?
A)2.0 times
B)3.0 times
C)4.0 times
D)5.0 times

Question

Quizplus · Accepted Answer

Interest coverage is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense.

EBIT = Total revenues - Total expenses (excluding interest and taxes)
EBIT = $20 million - ($13 million + $2 million + $2 million)
EBIT = $3 million

Interest coverage = EBIT / Interest expense
Interest expense = $1 million

Interest coverage = $3 million / $1 million
Interest coverage = 3.0 times

Therefore, the answer is choice B, 3.0 times.

SEQ CHAPTER \H \R 1This Statement of Facts Is Presented