1. A company's interest expense is $26,000. Its income before interest expense and income taxes is...
1. A company's interest expense is $26,000. Its income before interest expense and income taxes is $221,000. Its net income is $106,100. The company's times interest earned ratio equals:
Homework Answers
TIMES INTEREST EARNED RATIO
ALSO KNOWN AS INTEREST
COVERAGE RATIO
GIVEN DATA :
INTEREST expense - $26000
income before interest expnese and tax(EBIT)=$221000
net income=$106100
FORMULA FOR CALCULATING TIMES INTEREST EARNED RATIO =
earnings before interest and tax expense (EBIT)/ interest
expense
there is also another formula for calculation of times interest
earned ratio : NET INCOME + INTEREST +TAX /INTEREST
EXPENSE
TIMES INTEREST EARNED RATIO BY FORMULA 1 = $221000 /
$26000
=8.5
BY FORMULA 2 = NET INCOME =$106100 ( EBIT -INTEREST-TAX)
INTEREST EXPENSE = $26000
TAX EXPENSE =( EBIT -INTEREST ) - NET INCOME
= ${(221000-26000)-106100}
=88900
=106100+26000+88900/26000
=8.5
BY BOTH THE FORMULA WE ALWAYS GET THE SAME VALUE
HIGHER THE VALUE OF TIMES INTEREST EARNED RATIO ,HIGHER THE
CAPACITY OF COMPANY TO COVER ITS INTEREST EXPENSE
HIGHER IS THE BETTER.
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