Debt Management Ratios Calculate the times interest earned ratio for Paige's Purses, Inc. using the following information. Sales = $50,000,000, cost of goods sold = $15,000,000, depreciation expense = $2,000,000, addition to retained earnings = $10,000,000, dividends per share = $1.10, tax rate = 30%, and number of shares of common stock outstanding = 10,000,000. Paige's Purses has no preferred stock outstanding.
A) 0.27
B) 3.30
C) 11.00
D) 16.67

Question

Quizplus · Accepted Answer

First, we need to calculate earnings before interest and taxes (EBIT) which is calculated as:
Sales - cost of goods sold - depreciation expense = $50,000,000 - $15,000,000 - $2,000,000 = $33,000,000

Next, we need to calculate the interest expense which is not given in the information provided. Therefore, we need to use the times interest earned (TIE) ratio formula to solve for it. TIE is calculated as:
TIE = EBIT / Interest expense

We can rearrange the formula to solve for interest expense:
Interest expense = EBIT / TIE

We are given the following information:
Addition to retained earnings = $10,000,000
Dividends per share = $1.10
Tax rate = 30%
Number of shares of common stock outstanding = 10,000,000

We can calculate the total dividends paid as:
Total dividends = Dividends per share x Number of shares = $1.10 x 10,000,000 = $11,000,000

We can calculate the net income as:
Net income = Addition to retained earnings - Total dividends
Net income = $10,000,000 - $11,000,000 = -$1,000,000 (since the company paid out more in dividends than it added to retained earnings)

Now we can use the TIE ratio formula with the information we have to solve for interest expense:
11 = ($33,000,000 - (-$1,000,000)) / Interest expense
Interest expense = $3,000,000

Finally, we can calculate the TIE ratio using the interest expense we just calculated:
TIE = EBIT / Interest expense
TIE = $33,000,000 / $3,000,000
TIE = 11.00

Therefore, the correct answer is C) 11.00.

Debt Management Ratios Calculate the Times Interest Earned Ratio for Paige's