Question: A debt limitation covenant prohibits a borrower from issuing additional longterm debt if it would cause the issuer's interest coverage ratio (EBIT to total interest)

A debt limitation covenant prohibits a borrower from issuing additional longterm debt if it would cause the issuer's interest coverage ratio (EBIT to total interest) to fall below 3.00 times. Suppose the firm's earnings before interest and taxes (EBIT) are $78M (M = million), and interest is $20M. Everything else equal, how much additional 6% debt can the firm incur without reducing the interest coverage ratio of below 3.00?

a. $50 million of debt

b. $125 million of debt

c. $100 million of debt

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