Claudia's Cupcakes has sales of $3 450 000, total assets of $1 240 000 and total liabilities of $275 000, which consist strictly of notes payable.The firm's operating profit margin is 16.1%, and it pays a 10% rate of interest on its notes payable.How much is the firm's times-interest-earned?
A)15.6
B)45.3
C)20.2
D)3.0

Question

Quizplus · Accepted Answer

Operating profit = Sales x Operating profit margin
Operating profit = $3,450,000 x 16.1% = $556,950

Times Interest Earned (TIE) = Operating Profit / Interest Expense
Interest Expense = Notes Payable x Interest Rate
Interest Expense = $275,000 x 10% = $27,500

TIE = $556,950 / $27,500 = 20.2

Therefore, the firm's times-interest-earned is 20.2, and the best choice is C.

Claudia's Cupcakes Has Sales of $3 450 000, Total Assets