Consolidated Industries has total interest charges of $20,000 per year.Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales.The firm has a marginal tax rate of 40%.What is the firm's times-interest-earned ratio?
A)10
B)11
C)12
D)13

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax profit:

After-tax profit = 6% x $2,000,000 x (1 - 0.40) = $72,000

Then, we need to calculate the earnings before interest and taxes (EBIT):

EBIT = Operating income + Interest charges = $220,000 + $20,000 = $240,000

Finally, we can calculate the times-interest-earned ratio:

Times-interest-earned ratio = EBIT / Interest charges = $240,000 / $20,000 = 12

Therefore, the answer is B.

Consolidated Industries Has Total Interest Charges of $20,000 Per Year