One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned ratio for any outstanding debt the company may have.For Tempo Solutions Corporation, $10,000 of bonds paying 6.5% annually is outstanding.Income before interest and taxes is $7,000.How would Tempo Solutions Corporation calculate the times interest earned ratio?
A) Income before interest and taxes divided by the interest expense.
B) Income before interest and taxes divided by carrying value of the bonds outstanding.
C) Income before interest and taxes divided by the face rate on bonds.
D) Face amount of bonds divided by income before interest and taxes.

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated by dividing the company's income before interest and taxes by the interest expense. In this case, the interest expense is the annual interest payment on the $10,000 of outstanding bonds, which is calculated as $10,000 x 6.5% = $650. Therefore, the times interest earned ratio for Tempo Solutions Corporation would be $7,000/$650 = 10.77.

One Way Analysts Measure the Ability of a Company to Meet