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

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated as Earnings Before Interest and Taxes (EBIT) divided by interest expense. Given a ratio of 4.5 times and an interest expense of $20,000, the EBIT is $20,000 * 4.5 = $90,000. To find the net income, we subtract both the interest expense and taxes from EBIT. Taxes are 40% of ($90,000 - $20,000) = $28,000. Therefore, net income = $90,000 - $20,000 - $28,000 = $42,000.

The Times Interest Earned Ratio of McHugh Company Was 4