The calculation of the number of times interest is earned involves dividing
A) net income by annual interest expense.
B) net income plus income taxes by annual interest expense.
C) net income plus income taxes and interest expense by annual interest expense.
D) none of these answers are correct.

Question

Quizplus · Accepted Answer

The calculation of the number of times interest is earned, also known as the interest coverage ratio, involves dividing net income plus income taxes and interest expense by annual interest expense. This formula adds back interest expense and income taxes to net income because it aims to measure the company's ability to cover its interest obligations before these expenses.

The Calculation of the Number of Times Interest Is Earned