Heavy Load, Inc. has sales of $3,450,000, total assets of $1,240,000, and total liabilities of $275,000, which consist strictly of notes payable. The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable. How much is the firm's times-interest-earned?
A) 15.6
B) 45.3
C) 20.2
D) 3.0

Question

Quizplus · Accepted Answer

To calculate the times-interest-earned ratio, we need to determine the earnings before interest and taxes (EBIT). We can use the operating profit margin to calculate EBIT as follows: 
EBIT = Operating profit margin × Sales = 0.161 × $3,450,000 = $555,450

Next, we can calculate the interest expense as follows: 
Interest expense = Notes payable × Interest rate = $275,000 × 0.10 = $27,500

Finally, we can calculate the times-interest-earned ratio as follows: 
Times-interest-earned = EBIT / Interest expense = $555,450 / $27,500 = 20.2

Therefore, the firm's times-interest-earned is 20.2.