Mariah Company has a times interest earned ratio of 3.0 for the year just ended.The company's tax rate is 40% and the interest expense for the year was $25,000.Mariah Company's after-tax net income was:
A) $25,000.
B) $30,000.
C) $50,000.
D) $75,000.

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense. In this case, we know that the times interest earned ratio is 3.0 and the interest expense is $25,000.

3.0 = EBIT / $25,000

Multiplying both sides by $25,000 gives:

EBIT = 3.0 x $25,000 = $75,000

We also know that the tax rate is 40%, so the after-tax net income can be calculated as:

After-tax net income = EBIT x (1 - tax rate) 
= $75,000 x (1 - 0.40) 
= $45,000

Therefore, the correct answer is B) $30,000, which is the after-tax net income when the interest expense is taken out.

Mariah Company Has a Times Interest Earned Ratio of 3