Question

Cash Coverage, Inc. had net sales of $700,000 last year, and increased its retained earnings by $75,000 for the year after paying a dividend of $2 per share on 37,500 outstanding shares. The tax rate for the company is 40%. The company had cost of goods sold of $275,000 and its accumulated depreciation increased by $125,000. What is its cash coverage ratio?

Answer 1

Dividends = Dividend per share * Number of Shares
Dividends = $2 * 37,500
Dividends = $75,000

Increase in Retained Earnings = Net Income - Dividends
$75,000 = Net Income - $75,000
Net Income = $150,000

EBIT = Net Sales - Cost of Goods Sold - Depreciation Expense
EBIT = $700,000 - $275,000 - $125,000
EBIT = $300,000

EBT = Net Income / (1 - Tax Rate)
EBT = $150,000 / (1 - 0.40)
EBT = $250,000

Interest Expense = EBIT - EBT
Interest Expense = $300,000 - $250,000
Interest Expense = $50,000

Cash Coverage Ratio = (EBIT + Depreciation Expense) / Interest Expense
Cash Coverage Ratio = ($300,000 + $125,000) / $50,000
Cash Coverage Ratio = 8.50 times