PFM Company has sales of $210,000,interest expense of $8,000,a tax rate of 30%,and a net profit after tax of $35,000.PFM Company's times interest earned ratio is:
A) 4.375 times.
B) 5.375 times.
C) 7.25 times.
D) 15.5 times.

Question

Quizplus · Accepted Answer

Times interest earned ratio is calculated as EBIT (earnings before interest and taxes) divided by interest expense.

EBIT = Sales - Cost of goods sold - Operating expenses
     = $210,000 - COGS - Operating expenses (not given)

Net profit after tax is given as $35,000, which is after paying taxes and interest expense. So, we can assume that the $8,000 interest expense is already deducted from EBIT.

EBIT = Net profit after tax + Interest expense / (1- Tax rate)
     = $35,000 + $8,000 / (1- 0.30)
     = $57,143

Now, we can calculate times interest earned ratio as follows:

Times interest earned ratio = EBIT / Interest expense
                                  = $57,143 / $8,000
                                  = 7.143 times
                                  
The closest answer choice is C) 7.25 times, which is the best answer.

PFM Company Has Sales of $210,000,interest Expense of $8,000,a Tax