Answer:
The maximum debt to capital ratio is 43.08%
Explanation:
Since in the question, the Times interest earned ratio is given through which we can compute the amount of interest expense. But before that, we have to find out the Earning before income and taxes (EBIT) amount.
So, the EBIT = Sales - operating cost
= $450,000 - $355,000
= $95,000
And, the times interest earned ratio = EBIT ÷ Interest expense
4 times = $95,000 ÷ Interest expense
So, the interest expense = $23,750
The interest rate is given 7.5% but we have to use this rate so that the value of debt can be calculated.
Let us assume the debt value is 100
So, the debt value = Interest expense × (Assume debt ÷ interest rate)
= $23,750 × (100 ÷ 7.5%)
= $316,667
And, the total asset is $735,000
So, the debt to capital ratio equals to
= (Debt ÷ total invested capital) × 100
= $316,667 ÷ $735,000
= 43.08%
