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Cash Coverage, Inc
Cash Coverage, Inc. had net sales of $400,000 last year, and increased its retained earnings by $40,000 for the year after paying a dividend of $2 per share on 15,000 outstanding shares. The tax rate for the company is 40%. The company had cost of goods sold of $200,000 and its accumulated depreciation increased by $50,000. What is its cash coverage ratio?
A. 5.45
B. 3.00
C. 4.67
D. 4.31
E. 8.50
F. 3.71
G. 6.00
H. 2.50
Expert Solution
Net income = increase in retained earnings + dividends
= 40000+2*15000
= 70000
PBT = Net income/(1-tax rate)
= 70000/ (1- 0.4)
= $116,666.67
EBIT = sales - cogs - depreciation
= 400000- 200000- 50000
= 150000
Interest expense = EBIT - PBT
= 150000- $116,666.67
= $ 33,333.33
Cash coverage ratio =( Earnings Before Interest and Taxes + Non-Cash Expenses)/Interest Expense
= (150000+ 50000)/ $ 33,333.33
= 6.00
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