Use the following information from separate companies a through f.
1. Compute times interest earned. 2. Which company indicates the strongest ability to pay interest expense as it comes due?
Homework Answers
Requirement 1:
| Times interest earned ratio | ||||||
| Company | EBIT | / | Interest expense | = | Ratio | |
| a | 209,160 | / | 51,660 | = | 4.04878 | times |
| b | 209,844 | / | 45,828 | = | 4.578947 | times |
| c | 198,814 | / | 7,746 | = | 25.66667 | times |
| d | 194,922 | / | 42,840 | = | 4.55 | times |
| e | 122,850 | / | 9,828 | = | 12.5 | times |
| f | 13,054 | / | 48,334 | = | 0.270079 | times |
Calculations:
| Net income (loss) | Interest expense | + | Income Taxes | = | EBIT | ||
| a | 126,000 | + | 51,660 | + | 31,500 | 209,160 | |
| b | 120,600 | + | 45,828 | + | 43,416 | 209,844 | |
| c | 129,100 | + | 7,746 | + | 61,968 | 198,814 | |
| d | 107,100 | + | 42,840 | + | 44,982 | 194,922 | |
| e | 81,900 | + | 9,828 | + | 31,122 | 122,850 | |
| f | -35,280 | + | 48,334 | + | 0 | 13,054 |
Requirement 2:
Company c has the strongest ability to pay interest expense as it has higher times interest earned ratio.
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