Question

Calculating the Times Interest Earned Ratio For the most recent year, ICU Windows, Inc., had sales of $380,000, cost of goods sold of $110,000, depreciation expense of $32,000, and additions to retained earnings of $41,620. The firm currently has 30,000 shares of common stock outstanding, and the previous year's dividends per share were $1.50. Assuming a 34 percent income tax rate, what was the times interest earned ratio?

Answer 1

A в I c D E 4 Less: 7 Less: Particulars Net sales Cost of goods sold Depreciation EBIT Interest paid EBT Taxes Net income Dividends paid Addition to retained earnings Amount 380000 110000 32000 2,38,000 1,06,758 131242 44622 86620 45000 41620 9 Less: 11 Less: 12 13 14 15 Times interest earned ratio = EBIT/ Interest expense =238000/106758 = 2.23 times (approx)

Excel formula:

В EBIT Particulars Amount Net sales 380000 Less: Cost of goods sold 110000 Depreciation 32000 C3-C4-C5 7 Less: Interest paid =C6-08 EBT =C10*100/66 9 Less: Taxes =C8*34% Net income =C12+C11 Less: Dividends paid =30000*1.5 | Addition to retained earnings 41620 13 Times interest earned ratio = EBIT Interest expense 15 =238000/106758 = 2.23 times (approx) 12 14 16

Answer 2

Net Income =Addition to retained earnings+Dividend

= 41620+30000*1.5

= 41620+45000

= 86620

Net Income = (Sales- COGS-Depreciation-Interest)*(1-Tax rate)

86620= (380000-110000-32000-Interest)*(1-0.34)

131242.42= 238000-Interest

Interest = 106757.58

Times Interest Earned ratio = Interest/net Income = 106757.58/86620 = 1.23 times

Answer 3

EBIT = Sales – Costs - Depreciation expense = $380,000 - $110,000 - $32,000 = $238,000 Dividend = common stock outstanding × previous year’s dividends per share = $30,000 × $1.50 = $45,000 Addition to Retained Earnings = Net Income – Dividend => Net Income = Addition to Retained Earnings + Dividend Net Income = $41,620 + $45,000 = $86,620 Net Income = Earnings before Taxes × (1 – Tax Rate) => Earnings before Taxes = Net Income / (1 – Tax Rate) = $86,620 / (1 – 0.34) = $131,242.42 Taxes = Earnings before Taxes × Tax Rate = $131,242.42 × 0.34 = $44,622.42 Interest Expense = EBIT - Earnings before Taxes = $238,000 - $131,242.42 = $106,757.58 Times Interest Earned = EBIT / Interest Expense = $238,000 / $106,757.58 = 2.22 times Times Interest Earned ratio = 2.22 times