Question

A fixed charges coverage ratio of 4 signifies ___________________.

• A. Pre-tax operating income is 4 times all fixed financial obligations.
• B. Post-tax income plus depreciation is 4 times all financial obligations.
• C. Pre-tax income before lease rentals is 4 times all fixed financial obligations.
• D. Post-tax income less preference dividends is 4 times all fixed financial obligations.
• E. Post-tax income plus debt interest and these rentals is 4 times all fixed financial obligations.

Answer 1

The correct option is A Pre-tax operating income is 4 times all fixed financial obligations.

Fixed charge coverage ratio measures debt servicing capability by showing the extent to which the pre-tax operating income covers all fixed financing charges.