Suppose a business is capitalized with $500,000 in Owners’ Equity plus $400,000 in loans which carry...
Suppose a business is capitalized with $500,000 in Owners’ Equity plus $400,000 in loans which carry a 5% interest rate. This year’s projected revenue is $1 million, with variable and fixed costs $600,000 and $100,000 (no depreciation), respectively. Profits taxes are 25%. Calculate the coverage ratio for the year. Do it two ways: By moving down the waterfall, to see the money available to service debt. And by moving up from the bottom of the waterfall – that is, adding back taxes and interest to profits.
Homework Answers
| Revenue | 1000000 |
| Less: Costs | 700000 |
| EBIT | 300000 |
| Less: Interest | 20000 |
| PBT | 280000 |
| Less: Tax | 70000 |
| Net Income | 210000 |
1: By moving down the waterfall
Coverage ratio = EBIT/Interest
= 300000/20000
= 15
2: By moving up from the bottom of the waterfall
Coverage ratio = (Net Income+Tax+Interest)/ Interest
= (210000+70000+20000)/20000
=15
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