Asked by Sebastian Alonso on Apr 28, 2024
Verified
Neelty Corporation has interest expense of $16,000, sales of $600,000, a tax rate of 30%, and after-tax net income of $56,000.The company's times interest earned ratio is closest to:
A) 6.0
B) 5.0
C) 4.5
D) 3.5
Interest Expense
The cost incurred by an entity for borrowed funds, which is recognized in the financial statements as an expense.
Times Interest Earned Ratio
A financial metric that measures a company's ability to cover its interest expenses with its earnings before interest and taxes.
Net Income
The total profit of a company after all expenses, including taxes and operating costs, have been deducted from total revenue.
- Determine times interest earned ratios.
Verified Answer
After-tax net income = Earnings before taxes and interest - [0.30 × (Earnings before taxes and interest - Interest expense)] - Interest expense
After-tax net income = (0.70 × Earnings before taxes and interest)- (0.70 × Interest expense)
$56,000 = (0.70 × Earnings before taxes and interest)- (0.70 × $16,000)
$56,000 = 0.70 × Earnings before taxes and interest - $11,200
0.70 × Earnings before taxes and interest = $56,000 + $11,200
Earnings before taxes and interest = ($56,000 + $11,200)÷ 0.70 = $96,000
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $96,000 ÷ $16,000 = 6
Learning Objectives
- Determine times interest earned ratios.
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