Question

A firm has net income of $4,238 and interest expense of $898. the tax rate is 35 percent. what is the firm's times interest earned ratio?

Answer 1

Calculation of firm's times interest earned ratio:

The times interest earned ratio can be calculated with the help of following formula:

Times interest earned ratio = Income before Interest and Tax / Interest Expense

Interest expense is given $898, and Income before Interest and Tax can be calculated as follows:

Net Income $4,238

Add: Tax (4238*35/65) $2,282

Income before tax  =$6520

Add: Interest Expense $898

Income before Interest and Tax = $7,418

Hence, Times interest earned ratio = 7418 /898 = 8.26 times