Explanation:
The interest coverage ratio using EBITDA is calculated as:
EBITDA Interest Coverage Ratio = EBITDA / Interest Expense
Where EBITDA = Operating Income + Depreciation & Amortization
Wait, let me recalculate:
Year 1: EBITDA = 168 + 422 = 590 Interest Coverage = 590 / 120 = 4.9167
Year 2: EBITDA = 217 + 416 = 633 Interest Coverage = 633 / 155 = 4.0839
Actually, the ratio decreased from 4.92 to 4.08, which suggests deterioration, not improvement. Let me check my calculations again:
Year 1: EBITDA = 168 + 422 = 590 Interest Expense = 120 Coverage Ratio = 590 / 120 = 4.9167
Year 2: EBITDA = 217 + 416 = 633 Interest Expense = 155 Coverage Ratio = 633 / 155 = 4.0839
The coverage ratio decreased from 4.92 to 4.08, which means the company's ability to cover interest payments with EBITDA has deteriorated.
However, let me reconsider the question. The correct answer should be A. deteriorated because:
Correct Answer: A. deteriorated
Key Points:
Ultimate access to all questions.
An analyst gathers the following information about a company (in $thousands):
| Year 1 | Year 2 | |
|---|---|---|
| Operating income | 168 | 217 |
| Depreciation and amortization | 422 | 416 |
| Interest expense | 120 | 155 |
Based on the interest coverage ratio using EBITDA, the company's creditworthiness has:
A
deteriorated.
B
remained the same.
C
improved.
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