84

b. Deviation from mean before ratio is one to one:

Times interest earned: $2,000 - $732 = $1,268 Debt-service coverage: $2,000 - $1,089 = $911 Standardizing the deviations:

1,268 Times interest earned: - = ,845 1,500 911 Debt-service coverage: - = ,607 1,500 Using Table C, these standardized deviations correspond to probabilities of the two ratios being less than one to one of approximately 20 percent and 27 percent, respectively. (These probabilities assume that the distribution of possible EBITs is normal.)

c. There is a significant probability, 27 percent, that the company will fail to cover its interest and principal payments. Its debt ratio of $7.4 million/$