A company has reported operating income of $25,000,000. The bond interest expense for the year is $4,000,000 and principal payments on bonds totaled $1,000,000. The company's debt service coverage ratio is:

The company's debt service coverage ratio is 5.

Explanation:

The debt service coverage ratio refers to the financial ratio that give a measure of the ability of a company to meet its current debts obligation.

The debt service coverage ratio therefore compares the operating income of the company with the company's total debt service obligations.

The total service obligation includes the current interest, principal repayment, and any other debt obligations.

The formula for calculating the debt service coverage ratio is given as follows:

Debt service coverage ratio = Operating income / Total debt service costs

Form the question, we have:

Operating income = $25,000,000

Total debt service costs = Interest expense + Principal payments on bonds = $4,000,000 + $1,000,000 = $5,000,000

Substituting the values into the formula, we have:

Debt service coverage ratio = $25,000,000 / $5,000,000 = 5

Therefore, the company's debt service coverage ratio is 5.

Since this is greater than 1, this iimplies that operating profits made by the company is more than enough to pay its current debt service costs.

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