Question

The following selection financial data pertains to Callow Corporation for the current year ended December 31: Operating Income $900,000Interest Expense (100,000) Income before income tax 800,000 Income tax expense (320,000) Net Income 480,000 Preferred stock dividends (200,000) Net Income available to common stockholders $280,000 The times interest earned ratio is:_______

Answer 1

Answer:

Times interest earned

Explanation:

The times interest earned is a ratio which is used o measure the financial risk of a company which uses  some forms of  debt finance .

Financial risk is the variability in return to equity holders occasioned by the payment of interest on the use of debt . Also, companies which use debt run the risk of not having enough cash to pay their debt obligations and therefore might  run bankrupt. All of these  explain financial risk which the times interest earned ration measures.

Times interest earned is computed as

Profit before Interest and Tax/Interest expense

DATA:

Operating income (Profit before Interest and Tax) = 900,000

Times interest earned =100,000

Times interest earned=900,000/100,000 = 9 times

Times interest earned= 9 times