PFM Company has sales of $210,000,interest expense of $8,000,a tax rate of 30%,and a net profit after tax of $35,000.What is PFM Company's times interest earned ratio?

Question

Quizplus · Accepted Answer

The formula for the times interest earned ratio is:
Times interest earned ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense

First, we need to calculate the EBIT:
EBIT = Sales - Cost of Goods Sold - Operating Expenses
Given that there is no information on the cost of goods sold or operating expenses, we can assume that they're already factored into the net profit after tax.

So, EBIT = Net profit after tax + Interest expense + Tax expense
= $35,000 + $8,000 / (1 - 30%)
= $51,429

Now, we can calculate the times interest earned ratio:
Times interest earned ratio = EBIT / Interest Expense
= $51,429 / $8,000
= 6.43 times (rounded to two decimal places)

Therefore, the closest answer choice is C) 7.250 times.

PFM Company Has Sales of $210,000,interest Expense of $8,000,a Tax