In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000.The firm has a single issue of debt outstanding with a face value of $1 million, market value of $.92 million, and a coupon rate of 8%.What is the firm's times interest earned ratio? (Use value in dollars)
A)3.75
B)2.98
C)2.80
D)3.40

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated as EBIT / Interest expense. EBIT is calculated as Revenue - COGS - Depreciation = $3 million - $2.5 million - $200,000 = $300,000. Interest expense is calculated as Coupon rate * Face value of debt = 8% * $1 million = $80,000. Therefore, the times interest earned ratio is $300,000 / $80,000 = 3.75.

In the Past Year, TVG Had Revenues of $3 Million