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A firm has 2,000000 shares of stock outstanding total debt of $3000000 at an annual interest rate of 8% and annual depreciation expense of 300,000,
A firm has 2,000000 shares of stock outstanding total debt of $3000000 at an annual interest rate of 8% and annual depreciation expense of 300,000, and is considering borrowing an additional $6000000 at 8% and buying back one-half of those shares. Assuming EBIT of $1.12 million, what is the company's cash coverage ratio (a) before and (b) after the proposed restructuring? What can you conclude about the impact of financial leverage on a firm's cash coverage ratio?
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