EBIT to Interest Charges Ratio Quiz
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Questions and Answers

What is the recommended EBIT to interest charges ratio as a satisfactory guideline?

  • 12 to 15 times
  • 5 to 6 times (correct)
  • 8 to 10 times
  • 2 to 3 times
  • If a company's EBIT is $2 million, what would be the upper limit of its interest charges to meet the satisfactory guideline?

  • $1.5 million (correct)
  • $200,000
  • $1.2 million
  • $300,000
  • Why is it important for the EBIT to be higher than the interest charges according to the text?

  • To avoid short-term debts
  • To ensure long-term solvency (correct)
  • To attract potential investors
  • To increase shareholder dividends
  • 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.

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