Hedgepeth Inc.’s net income for the most recent year was $16,185. The tax rate w

Question

Hedgepeth Inc.’s net income for the most recent year was $16,185. The tax rate was 40 percent. The firm paid $3,906 in total interest expense and deducted $2,585 in depreciation expense. What was the cash coverage ratio for the year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Hedgepeth Inc.’s net income for the most recent year was $16,185. The tax rate was 40 percent. The firm paid $3,906 in total interest expense and deducted $2,585 in depreciation expense. What was the cash coverage ratio for the year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Cash coverage ratio=(Earnings before Interest and Taxes+Non-Cash Expenses)/Interest Expense                                                      

Earnings before Interest and Taxes = Net Income * 100/ 60 + Interest Expense

                                                                    = 16,185*100/60 + 3,906

                                                                   = 26,975 + 3,906

                                                               = $ 30,881

(Suppose The Earning before Tax is 100$ and Tax is 40$ then Net Income is 60$. Therefore, Earnings before Tax is got by cross-multiplying by 100 and dividing by 60.)

Non-Cash Expense = Depreciation = $ 2,585

Interest Expense = $ 3,906

Cash Coverage Ratio = (30,881 + 2,585) / 3906

                                    = 8.57 Times

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