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11 March, 13:50

Ram Company's after-tax net income was $120. Their interest paid was $50. Assuming the corporate tax is 40%, what is Ram Company's interest coverage ratio?

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  1. 11 March, 14:10
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    5

    Explanation:

    The formula to compute the interest coverage ratio is shown below:

    = (Earning before tax + interest expense) : (interest expense)

    where,

    Earning before tax equal to

    = Net income : (1 - tax rate)

    = $120 : (1 - 0.40)

    = $200

    And interest expense is $50

    So, the interest coverage ratio equal to

    = ($200 + $50) : ($50)

    = 5
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