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JKL Corporation has a projected times-interest-earned ratio of 4.0 for next year. What percentage could EBIT decline next year before JKL’s times-interest-earned ratio would fall below 1.0? 3% 30% 75% 90% 300% Insufficient information is provided.

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Kolawole845

Answer:

EBIT should fall by more than 75%

Explanation:

Interest cove is he number of times a company Earnings before interest and tax covers the interest payment.

Current Interest cover = 4 times.

This implies that the current EBIT is 4 times the interest payment, meaning that the interest payment would be 1.

So for the interest cover to fall below a ratio of 1, then the EBIT should fall from 4 to a figure below 1, this will represent a change of 3 units

The percentage decline should be greater than

= (4-1/4) × 100

= 75%

So for the times interest earned to fall below 1, then the EBIT should fall by more than 75%

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