Interest coverage ratio is defined as EBIT divided by interest expense. If EBIT=900,000 and interest=300,000, what is the ratio?

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Multiple Choice

Interest coverage ratio is defined as EBIT divided by interest expense. If EBIT=900,000 and interest=300,000, what is the ratio?

Explanation:
Interest coverage ratio tells you how many times a company’s operating earnings can cover its interest payments. It is calculated by dividing EBIT by interest expense. Here, EBIT is 900,000 and interest expense is 300,000, so the ratio is 900,000 ÷ 300,000 = 3.0x. This means the company earns enough to cover its interest three times over, giving a comfortable safety margin for interest obligations. A ratio of 2.0x would indicate less cushion, 1.0x would be just barely enough to cover, and 4.0x would show an even larger cushion. Hence, the value is 3.0x.

Interest coverage ratio tells you how many times a company’s operating earnings can cover its interest payments. It is calculated by dividing EBIT by interest expense. Here, EBIT is 900,000 and interest expense is 300,000, so the ratio is 900,000 ÷ 300,000 = 3.0x. This means the company earns enough to cover its interest three times over, giving a comfortable safety margin for interest obligations. A ratio of 2.0x would indicate less cushion, 1.0x would be just barely enough to cover, and 4.0x would show an even larger cushion. Hence, the value is 3.0x.

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