Question

For the most recent year, Camargo, Inc., had sales of $594,000, cost of goods sold of $255,330, depreciation expense of $67,900, and additions to retained earnings of $80,300. The firm currently has 27,500 shares of common stock outstanding and the previous year’s dividends per share were $1.64. Assuming a 25 percent income tax rate, what was the times interest earned ratio?

Answer 1

Answer: 2.61 times

Explanation:

Times Interest ratio = Earnings before Interest and Tax / Interest

Earnings before Interest and tax = Sales - Cost of goods sold - Depreciation expenses

= 594,000 - 255,330 - 67,900

= $270,770

Net Income = Addition to retained earnings + Total dividends paid

Net income = 80,300 + ( 27,500 * 1.64)

= $125,400

Earnings before tax = Net Income/ ( 1 - T)

= 125,400/ ( 1 - 0.25)

= $167,200

Interest = Earnings before interest & tax (EBIT) - Earnings before tax (EBT)

= 270,770 - 167,200

= $103,570

Times Interest ratio = 270,770 / 103,570

= 2.61 times