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# Debt Ratios and EBITDA Coverage

1. A company has a total asset turnover ratio of 3.5X and net annual sales of \$42.00 million, if a company has \$3 million of total debt on its balance sheet, what would the debt ratio?

2. Suppose we pay 10% annual interest on our outstanding debt. If we have a total operating cost (including depreciation and amortization) equal \$37 million what would the "times-interest-earned" ratio be?

3. Suppose we make annual payments of \$0.5 million to pay down our outstanding debt and have annual lease payments of \$0.5 million. Our depreciation and amortization expense was \$2million, what would our EBITDA coverage be?

4. Suppose we tend to borrow both long and short term funds. The "TIE" and EBITDA coverage ratios both measure how well we can cover our required payments, but with both ratios (TIE and EBITDA) we take a slightly different approach, which approach (ratio) would be more likely to concern a long-term lender? And why?

#### Solution Preview

1. A company has a total asset turnover ratio of 3.5X and net annual sales of \$42.00 million, if a company has \$3 million of total debt on its balance sheet, what would the debt ratio?

Total Assets Turnover Ratio =
3.5 = =
Total assets = = \$12,000,000
Debt ratio = = = 25%

2. Suppose we pay 10% annual interest on our outstanding debt. If we have a total operating cost (including depreciation and amortization) equal \$37 million what would the "times-interest-earned" ration be?

Sales - total operating cost (including ...

#### Solution Summary

The solution examines debt ratios and EBITDA coverage for net annual sales.

\$2.19