CFA Level I · CFA Level I Exam · Financial Analysis Techniques
A company reports net income of 300, interest expense of 100, and an effective tax rate of 25%. Depreciation is 150. The fixed charge coverage ratio is defined here as EBIT divided by interest expense. The coverage ratio is closest to:
Coverage is 5.0. Net income of 300 grossed up at a 25% tax rate gives pre-tax income of 400, and adding interest of 100 gives EBIT of 500. Dividing by interest of 100 yields 5.0; using pre-tax income alone gives 4.0.
- A4.0Correct
- B5.0
- C5.5
Explanation
Pre-tax income = 300 / (1 - 0.25) = 400. EBIT = 400 + 100 = 500. Coverage = 500 / 100 = 5.0.
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