Consolidated Industries has total interest charges of $20 000 per year.Sales of $2 million generated an operating profit of $220 000 and an after-tax profit of 6% of sales.The firm has a marginal tax rate of 39%.What is the firm's times-interest-earned ratio?
A)10
B)11
C)12
D)13

Question

Quizplus · Accepted Answer

The first step is to calculate the after-tax profit:

After-tax profit = 6% x $2 million x (1-0.39) = $72 000

Then, we can calculate the earnings before interest and taxes (EBIT):

EBIT = Operating profit + Interest charges 
EBIT = $220 000 + $20 000 
EBIT = $240 000

Finally, we can calculate the times-interest-earned (TIE) ratio:

TIE = EBIT / Interest charges 
TIE = $240 000 / $20 000 
TIE = 12

Therefore, the answer is B) 11.

Consolidated Industries Has Total Interest Charges of $20 000 Per