Calculate the times interest earned ratio using the following information. Sales = $1.5 million, cost of goods sold = $800,000, depreciation expense = $100,000, addition to retained earnings = $85,000, dividends per share = $1.2, tax rate = 30%, and number of shares of common stock outstanding = 100,000. Assume the firm has no preferred stock.
A) 2.25 times
B) 1.25 times
C) 1.95 times
D) 2.75 times

Question

Quizplus · Accepted Answer

First, we need to calculate earnings before interest and taxes (EBIT).
EBIT = Sales - Cost of Goods Sold - Depreciation Expense
EBIT = $1,500,000 - $800,000 - $100,000
EBIT = $600,000

Next, we need to calculate interest expense.
Interest Expense = EBIT * (1 - Tax Rate) - Addition to Retained Earnings - Dividends
Interest Expense = $600,000 * 0.7 - $85,000 - ($1.2 * 100,000)
Interest Expense = $384,000 - $85,000 - $120,000
Interest Expense = $179,000

Finally, we can calculate the times interest earned ratio.
Times Interest Earned Ratio = EBIT / Interest Expense
Times Interest Earned Ratio = $600,000 / $179,000
Times Interest Earned Ratio = 1.95 times

Therefore, the best choice is C) 1.95 times.

Calculate the Times Interest Earned Ratio Using the Following Information