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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

A company reports CFO of USD 600 million, interest paid of USD 50 million and taxes paid of USD 100 million, all already deducted within CFO under IFRS. Capital expenditures are USD 300 million and dividends paid are USD 120 million. The company's interest coverage ratio based on cash flow (CFO before interest and taxes divided by interest paid) is closest to:

Cash flow interest coverage is 15.0 times. Add interest of 50 and taxes of 100 back to reported CFO of 600 to get 750, then divide by interest paid of 50. Using unadjusted CFO gives 12.0 times, which ignores the required add-back.

  1. A12.0 times
  2. B15.0 timesCorrect
  3. C27.0 times

Explanation

CFO before interest and taxes = 600 + 50 + 100 = 750. Dividing by interest paid of 50 gives 15.0 times. Using CFO as reported (600/50 = 12.0) forgets the add-back. 27.0 is not supported by the data (adding capex-related items).

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