Question

A company's interest expense is $15,000. Its income before interest expense and income taxes is $86,250. Its net income is $31,900. The company's times interest earned ratio equals:_______
a. 0.47.
b. 5.75.
c. 0.37.
d. 0.17.
e. 2.70.

Answer 1

Answer:

b. 5.75.

Explanation:

The times interest earned is the number of times the net income or earnings before interest and taxes can be used to settle the interest expense of an entity.

It is given as the ratio of the earnings before interest and taxes to the interest accrued.

Given that

Interest expense = $15,000

Income before interest expense and income taxes = $86,250

The company's times interest earned ratio

= $86,250/$15,000

= 5.75

It means that the company's earnings before interest and taxes can settle the interest expense 5.75 times.

Answer 2

Answer:

b. 5.75

Explanation:

Times Interest earned ratio is the measure of ability of a company to pay the interest on its debts. It is the ratio of earning before interest and tax and interest expense as below.

Times Interest Earned Ratio = Earning before interest and tax / Interest Expense

Times Interest Earned Ratio = $86,250 / $15,000

Times Interest Earned Ratio = 5.75 times