Question

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:

Answer 1

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.