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Questions and Answers
What is the recommended EBIT to interest charges ratio as a satisfactory guideline?
What is the recommended EBIT to interest charges ratio as a satisfactory guideline?
If a company's EBIT is $2 million, what would be the upper limit of its interest charges to meet the satisfactory guideline?
If a company's EBIT is $2 million, what would be the upper limit of its interest charges to meet the satisfactory guideline?
Why is it important for the EBIT to be higher than the interest charges according to the text?
Why is it important for the EBIT to be higher than the interest charges according to the text?
Study Notes
EBIT to Interest Charges Ratio
- A recommended satisfactory guideline for the EBIT to interest charges ratio is 3:1 or higher.
- If a company's EBIT is $2 million, the upper limit of its interest charges to meet the satisfactory guideline would be $667,000 ($2,000,000 ÷ 3).
Importance of EBIT vs Interest Charges
- It is essential for a company's EBIT to be higher than its interest charges to ensure it can meet its interest expenses and avoid debt default.
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Description
Test your knowledge on EBIT to interest charges ratio and its significance. Determine the recommended EBIT to interest charges ratio, calculate the upper limit of interest charges based on a given EBIT, and understand the importance of EBIT being higher than interest charges.