Driver Enterprises reports 2015 earnings before interest and taxes (EBIT) of $45

Question

Driver Enterprises reports 2015 earnings before interest and taxes (EBIT) of $456,784 and interest expense of $36,235. Included in its reported operating expenses for 2015 were operating lease expenses of $126,000. It has also reported capitalized interest of $25,781. Based on footnote data and a discount rate of 11% you have already calculated the present value of the future operating lease obligations to be $740,411. Calculate the fixed charge coverage ratio after incorporating the impact of the operating leases using the 1/3-2/3 method. Present your answer rounded to two decimal places, e.g., 20.00.

Explanation / Answer

Fixed charge coverage ratio

EBIT+ fixed charge before tax/ fixed charge before tax+ interest

= 456784+246803.66/(246803.66+ 36235)= 2.48

Using 2/3 method:

456784+493607.33/529842.33= 1.793

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