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?

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