If EBIT is $40 and annual interest expense is $10, what is the interest coverage ratio?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

If EBIT is $40 and annual interest expense is $10, what is the interest coverage ratio?

Explanation:
Interest coverage shows how many times operating earnings (EBIT) can cover interest payments. It’s EBIT divided by the interest expense. With EBIT of 40 and interest expense of 10, the ratio is 40 ÷ 10 = 4. So the correct value is 4. The other options would require different interest costs (e.g., 3.5 would need about 11.4 in interest, 2 would need 20, 5 would need 8), but given the numbers provided, four is the right result.

Interest coverage shows how many times operating earnings (EBIT) can cover interest payments. It’s EBIT divided by the interest expense. With EBIT of 40 and interest expense of 10, the ratio is 40 ÷ 10 = 4. So the correct value is 4. The other options would require different interest costs (e.g., 3.5 would need about 11.4 in interest, 2 would need 20, 5 would need 8), but given the numbers provided, four is the right result.

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