Title: Can This Legacy Business Support My Retirement? Evaluating Dividend Payouts with Interest Coverage Tagline: Can This Legacy Business Support My Retirement? Evaluating Dividend Payouts with Interest Coverage Problem: Recently widowed, Eleanor, 68, inherited a $1.8 million Traditional IRA and her late husband's business, "Grandpa's Fix-It Shop." The business, while sentimental, carries a $250,000 business loan with annual interest payments of $20,000. Eleanor needs to determine if the business is stable enough to provide her with consistent dividend income, which she plans to live off of along with social security, or if reinvestment is the only smart option. The business reported EBIT of $60,000 last year. Is taking $30,000/year in dividends too risky? Solution: By using the Interest Coverage Ratio Calculator, Eleanor can quickly determine if "Grandpa's Fix-It Shop's" earnings adequately cover its interest expenses. With an EBIT of $60,000 and interest expense of $20,000, the Interest Coverage Ratio is 3.0. While generally considered adequate, Eleanor can then factor in her desired $30,000 dividend payout, reducing the available earnings for debt coverage and potential reinvestment. Eleanor needs to know that she can safely take dividends. ROI: Understanding the Interest Coverage Ratio helps Eleanor make an informed decision. A ratio of 3.0 indicates reasonable coverage, but factoring in the $30,000 dividend reduces the buffer significantly. If Eleanor decides to reinvest the profits instead of taking dividends, she could potentially strengthen the business's financial position, leading to increased profitability and higher, more sustainable dividend payouts in the future. Delaying dividends could result in a 10% increase in annual profit within three years, translating to approximately $6,000 more in available earnings annually. Description: Determine if a potential investment in "Grandpa's Fix-It Shop" offers sustainable dividend income after inheriting it from your late husband. This calculator helps assess the company's financial health by determining if its earnings can comfortably cover its interest obligations, influencing your decision about taking dividends versus reinvesting profits. Category: Client Service