Debt Management Ratios Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax rate = 30%, and number of shares of common stock outstanding = 1,000. Tierre's Ts has no preferred stock outstanding.
A) 0.1814
B) 0.4854
C) 0.685
D) 3.7756

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated as EBIT divided by interest expense. First, calculate EBIT: Sales - COGS - Depreciation = $200,000 - $50,000 - $13,000 = $137,000. Then, calculate net income: Addition to retained earnings + Dividends = $70,000 + ($0.50 * 1,000) = $70,500. Since net income = (EBIT - Interest) * (1 - Tax rate), solve for interest: $70,500 = ($137,000 - Interest) * 0.7. Interest = $37,000. Finally, times interest earned = $137,000 / $37,000 = 3.7756.

Debt Management Ratios Calculate the Times Interest Earned Ratio for Tierre's