The times interest earned ratio of McHugh Company is 4.5 times.The interest expense for the year was $20,000,and the company's tax rate is 40%.The company's net income is:
A) $22,000.
B) $42,000.
C) $54,000.
D) $66,000.

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense. Therefore, if the times interest earned ratio is 4.5 times, we can find the EBIT by multiplying the interest expense by the times interest earned ratio:

EBIT = times interest earned ratio x interest expense
EBIT = 4.5 x $20,000
EBIT = $90,000

Now, we can use the EBIT to calculate net income:

Net income = EBIT - taxes
Net income = $90,000 - 0.4($90,000)
Net income = $54,000

Therefore, the correct answer is B) $42,000.

The Times Interest Earned Ratio of McHugh Company Is 4