Given:
Operating profit of $210,000 after deducting fixed lease payments of $30,000.
Fixed interest expense = $50,000.
To find:
The firm's fixed charge coverage ratio.
Explanation:
The formula for fixed charge coverage ratio is
[tex]\text{Fixed charge ratio}=\dfrac{\text{EBIT + Fixed lease payment}}{\text{Fixed interest + Fixed lease payment}}[/tex]
where, EBIT is earning before interest and tax.
[tex]\text{Fixed charge ratio}=\dfrac{210000+30000}{50000+30000}[/tex]
[tex]\text{Fixed charge ratio}=\dfrac{240000}{80000}[/tex]
[tex]\text{Fixed charge ratio}=3[/tex]
Therefore, the firm's fixed charge coverage ratio is 3:1.
