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 percent, 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

The times interest earned ratio is calculated as EBIT divided by interest expense. First, calculate EBIT: Sales - COGS - Depreciation = $50,000,000 - $15,000,000 - $2,000,000 = $33,000,000. Next, calculate net income: Addition to retained earnings + Dividends = $10,000,000 + ($1.10 * 10,000,000) = $21,000,000. Since net income is after tax, calculate EBIT: Net income / (1 - tax rate) = $21,000,000 / 0.7 = $30,000,000. Interest expense is EBIT - Net income = $33,000,000 - $30,000,000 = $3,000,000. Times interest earned = EBIT / Interest expense = $33,000,000 / $3,000,000 = 11.00.

Calculate the Times Interest Earned Ratio for Paige's Purses, Inc