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mflash in the pan cooking school is considering the issuance of additional long term debt to...

  • mflash in the pan cooking school is considering the issuance of additional long term debt to finance expansion. At the present time the company has $400 million of 10% debentures outstanding. Its after-tax net income is $60 million, and the company’s (marginal) income tax rate is 40%. The company is required by the debenture holders to maintain its coverage ratio at 4 or greater. Determine flash’s percent coverage ratio.

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Answer #1

Interest Coverage Ratio = Earning before Interest & taxes (EBIT)/Interest Expense

Determining EBIT of mflash in the PAN Cooking School:-

Particular Amount in million $
After tax net Income 60
Add: Tax {60*(40/60)} 40
Earning before Tax(EAT) 100
Add: Interest Expenses(400 million *10%) 40
EBIT 140

Interest Coverage Ratio = 140/40

= 3.5 times

So, the mflash 's Interest Coverage Ratio(or Coverage Ratio) is 3.5 times.

Hence, the company's Coverage Ratio is less than 4.

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