CFA Practice Question

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CFA Practice Question

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon's interest coverage ratio?
A. 1 time
B. 3 times
C. 4 times
Explanation: ICR = operating profit / I = EBIT / I = 100,000/25000 = 4

User Contributed Comments 6

User Comment
Gina why not earnings before taxes minus interest expense?
tony1973 EBIT is the operating profit.
Shelton EBIT(OP), NI(EAT,NP),......
aigulb or (75+25)/25=4
Haydo The trick is in the name of the ratio 'Interest times coverage'. You want to measure how many times interest has been earned from operating profit, so deducting it first (ie EBT), does not provide as meaningful information.
endurance remember to add the interest to EBT 25,000+75,000=100,000 to get the EBIT.
EBIT/interest = 100,000/25,000=4 times
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