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Interest Coverage Ratio & Examples

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Mi Furst, Inc., has $100 million of earnings before interest and taxes, and $40 million of interest expense.

Compute the following:
a.Calculate Mi Furst's interest coverage ratio.

b.Calculate the pro forma interest coverage ratio assuming the issuance of $100 million of 10% debt with the issue proceeds to be invested fully in a plant under construction.

c.Calculate the pro forma interest coverage ratio assuming the issuance of $100 million of 10% debt with the proceeds to be invested temporarily in commercial paper that yields 8%.

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Solution Summary

In about 130 words, this solution computes the interest coverage ratio and the pro forma interest coverage ratio for the examples in question. All calculations and formulas are provided.

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Solution:
Interest Coverage Ratio = Earning Before Interest & Taxes(EBIT)/Interest Expense

Then:

a) Mi Furst Interest Coverage Ratio = 100/40 = 2.5 times when EBIT=100m and interest = 40m. ...

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