US CMA Part 2 · Chapter 1 · Question 12 of 15
Jansen Retail has earnings before interest and taxes of $650,000 (after deducting lease payments), interest expense of $90,000 and annual lease payments of $60,000. What is the fixed charge coverage ratio (rounded to two decimals)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 4.73 times
Explanation
Fixed charge coverage = (EBIT + lease payments) / (interest + lease payments). Lease payments are added back to the numerator because they were deducted in arriving at EBIT. ($650,000 + $60,000) / ($90,000 + $60,000) = $710,000 / $150,000 = 4.73 times. Failing to add back the lease payments gives 4.33, and 7.22 is the times interest earned ratio.
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