Question

1. Assume EBITDA is 10, EBIT is 8, EBT is 6.5 and the Net Income is 4. What is Times Interest Earned?

A. 3.2x

B. 1.5x

C. 5.3x

D. 8x

2. Assume that Net Income is $5 million, Common Shares outstanding is $2 million, Accumulated Retained Earnings is $4 million, and the Market Price per share of Common Stock is $20. What is the Price/Earning Ratio?

A. 4.0

B. 6.4

C. 8.0

D. 4.4

3. Consider the following information:

Ratio__________________________2013_____2014_____2015_____Industry Average

Days Sales Outstanding (DSO)_______6________8_______9.5_________10________

Which of the following statements is true?

A. DSO is bad relative to the industry average, but is heading in the right direction.

B. DSO is good relative to the industry average and is heading in the right direction.

C. DSO is good relative to the industry average, but is heading in the wrong direction.

D. DSO is bad realative to the industry average and is heading in the wrong direction.

Thank you in advance!!!

Answer 1

QUESTION - 1

Times Interest Earned Ratio is calculated by using the following formula

Times Interest Earned = EBIT / Interest Expenses

Interest Expenses = EBIT – EBT

= 8 – 6.50

= 1.50

Therefore, The Times Interest Earned Ratio= EBIT / Interest Expenses

= 8 / 1.50

= 5.3

“Hence, The Times Interest Earned = (c). 5.3x”

QUESTION - 2

Price/Earning Ratio is calculated by using the following formula

Price/Earning Ratio = Market Price per share / Earnings per share

Earnings per share = Net Income / Common Shares Outstanding

= $5 Million / 2 Million Shares

= $2.50 per share

Therefore, The Price/Earning Ratio = Market Price per share / Earnings per share

= $20 / $2.50 per share

= 8 Times

“Hence, The Price/Earning Ratio = (c). 8.0”

QUESTION - 3

The Correct Answer Choice is “(c). DSO is good relative to the industry average, but is heading in the wrong direction.”