A company with no interest-bearing debt enters int
A company with no interest-bearing debt enters into a finance lease on the first day on the reporting year. The lease requires a year-end payment of $175,000 for 10 years. In the second year of the lease, the company reported the EBIT of $450,000. Assuming a 7% imputed interest rate on the lease, the firm’s interest coverage ratio in the second year is closest to:
A. 4.3X
B. 5.2X
C. 5.6X
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2024-11-07 15:33:00
Ans:C.
The present value of the lease payment with an anunual payment of $175,000 (PMT) at the end of the year over the 10 year period (N), discounted at 7% (1/Y), is $1,229,127 (solve for PV).
Interest during the second year of the lease is $1,140,166 * 0.07= $79,812.
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