What advantage does the fixed charge coverage ratio offer over simply using times interest earned?
The fixed charges coverage ratio is computed to measure the company’s ability to meet all the fixed financial liabilities rather than just interest expenses.
It is considered as a debt utilization ratio. It can be computed as follows:
It is computed to know about the creditworthiness of the company. It shows the ability of the company to repay its debt with the available funds.
It is computed to know the company’s ability to meet the debt liability on the basis of the current income. Hence, it is advantageous to use a fixed charge coverage ratio as it shows the company’s ability to meet not only the interest expenses but other fixed charges also.
The Lancaster Corporation’s income statement is given below.
b. What would be the fixed-charge-coverage ratio?
Cost of goods sold
Fixed charges (other than interest)
Income before interest and taxes
Income before taxes
Income after taxes
Stein Books Inc. sold 1,900 finance textbooks for $250 each to High Tuition University in 20X1. These books cost $210 to produce. Stein Books spent $12,200 (selling expense) to convince the university to buy its books. Depreciation expense for the year was $15,200. In addition, Stein Books borrowed $104,000 on January 1, 20X1, on which the company paid 12 percent interest. Both the interest and principal of the loan were paid on December 31, 20X1. The publishing firm’s tax rate is 30 percent. Did Stein Books make a profit in 20X1? Please verify with an income statement.
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