Times Fixed Charge

### What does the Times Fixed Charge measure? - [x] A company's ability to cover its fixed financial obligations with its earnings before interest and taxes. - [ ] A company's total revenue relative to expenses. - [ ] A company's liquid assets ratio. - [ ] The overall profitability of a company. > **Explanation:** Times Fixed Charge measures the number of times a company can cover its fixed financial obligations like interest and lease payments with its earnings before interest and taxes (EBIT). ### What are examples of fixed charges? - [ ] Variable costs and advertising expenses. - [ ] Inventory costs and direct labor. - [x] Lease payments and interest expenses. - [ ] Raw materials and production costs. > **Explanation:** Fixed charges include recurring expenses such as interest payments and lease payments, which do not vary directly with production levels. ### How would a Times Fixed Charge ratio of less than 1 be interpreted? - [ ] The company is profitable. - [x] The company cannot cover its fixed charges. - [ ] The company is highly solvent. - [ ] The company has excessive liquidity. > **Explanation:** A Times Fixed Charge ratio of less than 1 indicates that the company cannot cover its fixed financial obligations with its earnings before interest and taxes. ### Given EBIT of $200,000, interest payments of $30,000, and lease payments of $20,000, what is the Times Fixed Charge? - [ ] 4 - [ ] 5 - [x] 4 - [ ] 3 > **Explanation:** The Times Fixed Charge is calculated as EBIT divided by the sum of interest and lease payments: \\( \frac{200,000}{30,000 + 20,000} = \frac{200,000}{50,000} = 4 \\). ### Why is a higher Times Fixed Charge ratio generally favorable? - [ ] It indicates higher profits. - [ ] It shows good liquidity. - [x] It signifies the company can comfortably cover its fixed charges. - [ ] It reflects lower operating costs. > **Explanation:** A higher Times Fixed Charge ratio indicates that the company can comfortably cover its fixed financial obligations multiple times over with its earnings before interest and taxes. ### How can fluctuations in revenue affect the Times Fixed Charge ratio? - [x] They can impact EBIT and thus the ratio. - [ ] They have no impact at all. - [ ] They only affect the interest component of fixed charges. - [ ] They modify the fixed expenses. > **Explanation:** Fluctuations in revenue can affect EBIT, thereby influencing the Times Fixed Charge ratio as EBIT is integral to its calculation. ### What does a Times Fixed Charge ratio of 1 imply? - [ ] The company has negligible fixed charges. - [x] The company can exactly cover its fixed charges. - [ ] The company is highly liquid. - [ ] The company is operating at a loss. > **Explanation:** A Times Fixed Charge ratio of 1 implies that the company can exactly cover its fixed financial obligations with its earnings before interest and taxes. ### Which financial metric is used in the calculation of Times Fixed Charge? - [ ] Net Profit Margin - [x] Earnings Before Interest and Taxes (EBIT) - [ ] Gross Revenue - [ ] Net Operating Cash Flow > **Explanation:** Earnings Before Interest and Taxes (EBIT) is the financial metric used to calculate the Times Fixed Charge ratio. ### How do lease payments affect the Times Fixed Charge ratio? - [ ] They decrease it. - [x] They are part of the fixed charges that need to be covered. - [ ] They have no effect on the ratio. - [ ] They increase it. > **Explanation:** Lease payments are considered fixed charges and are included in the numerator when calculating the Times Fixed Charge ratio, affecting the company's ability to cover its fixed obligations. ### Which of the following would improve a company's Times Fixed Charge ratio? - [x] Increasing EBIT while keeping fixed charges constant - [ ] Reducing EBIT - [ ] Increasing lease payments - [ ] Lowering revenue significantly > **Explanation:** Increasing EBIT while keeping fixed charges constant would improve the Times Fixed Charge ratio, indicating better coverage of fixed obligations.