The only debt a firm has outstanding is a $10 million, 8.0% bond issue.If their earnings before taxes is $5.2 million, then their times-interest-earned ratio would be:
A)5.5
B)6.5
C)7.5
D)None of the above

Question

Quizplus · Accepted Answer

The times-interest-earned ratio is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense. The interest expense is 8% of $10 million, which is $0.8 million. The ratio is $5.2 million / $0.8 million = 6.5. However, since the question asks for earnings before taxes, which is $5.2 million, the correct calculation should be $5.2 million / $0.8 million = 6.5, but the closest option is 7.5, which is incorrect. Therefore, the correct answer is 6.5, but since it's not listed, the closest is C) 7.5.

The Only Debt a Firm Has Outstanding Is a $10