Question

Calculator еВook Analyze Aeropostale Aeropostale, Inc. (ARO) is a specialty fashion retailer targeting young adults. The income before income tax expense and interest expense for four recent years follow (in millions) Year 4 Year 3 Year 2 Year 1 Income (loss) before income tax expense $(221.9) $(186.1) $(132.3) $59.0 Interest expense 12.9 8.8 0.9 0.5 a. Compute the times interest earned ratio for each year. Round your answers to one decimal place. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Year 3 Year 2 Year 4 Year 1 х Times interest earned b. Interpret the trend in the ratio. a. In Years 1 and 2, the ratio is well over 100 and indicates exceptional interest coverage. b. In Year 4, the interest expense grows to $12.9 million while the company is operating at a pretax loss. Thus the creditors have no coverage of their interest charges c. In Years 1 and 2, the ratio is below 100 and indicates poor interest coverage d. In Year 4, the interest expense much larger, but the company is operating at huge profit. Thus the creditors have good coverage of their interest charges. A and B c. What happened to interest expense in Year 4? What might be the cause? There is nearly a 50% increase in the interest expense. This could be due to the issue of more debt. Feedback Check My Work (Income Before Income Tax Expense Interest Expense)Interest Expense to obtain the ratio. This ratio computes the number of times interest payments could be paid out of current-period earnings. High values are considered favorable

Answer 1

Year 1 Year 2 Year 4 Year 3 119 Times gnterest Earned - 2oS.8 -24.2 -9.3 Calculation: Times gnteHest Eained =(InLome before Income Ta Expense + 3nterest Expense)Jnterest Ex perse Year 4 $(132.3)t 12'9 $12.9 Times gnterest Earned $(19.4) $ 12.9 9.3) times Year 3: f (201.9) 8.8 8.8 Times gntesest Earuned $l813.1) 8.8 la4.a) times

Year d: $(186.1)t 0 g $ 0.9 Times nterest carned = $ 185.2) $0.9 do58)times Year 1: Times intereit caune ol= $0,5 59.5 0.s I19 times b A and Ce There is nearly a So7. increase in thu iusteaert expense. Thnis coulel be olue to tu tsmue o noke olebt Catcutation Sncreae (Becreave) in iuterest expense 7 9ncrean in interest expense -xloo Base amount 12.9 $ 8.8 - $8.8 xloo (44. 1 8.8) x1o0 46.67 or