A firm has 2,000,000 shares of stock outstanding, total debt of $3,000,000 at an annual interest rate of 8% and annual depreciation expense of $300,000, and is considering borrowing an additional $6,000,000 at 8% and buying back one-half of those shares. Assuming EBIT of $1.2 million, what is this companys cash coverage ratio (a) before and (b) after the proposed restructuring? What can you conclude about the impact of financial leverage on a firms cash coverage ratio?

(b) Assume that for the company in #5, the interest rate for all of its borrowing was 10%. Assuming EBIT of $1.2 million, what is this companys cash coverage ratio (a) before and (b) after the proposed restructuring? What can yu conclude about the impact of interest rates on a firms cash coverage ratio?