The times-interest- earned ratios of Benin Inc. are 20.56 and 7.35 for the years 2013 and 2014, respectively. Which of the following can be the possible reason for such a change?

Question

Quizplus · Accepted Answer

The times-interest-earned ratio measures the ability of a company to meet its interest payments from its earnings before interest and taxes (EBIT). A higher ratio indicates a better ability to meet interest payments, whereas a lower ratio indicates a weaker ability to meet interest payments. Therefore, a decrease in the times-interest-earned ratio from 2013 to 2014 suggests that Benin Inc. was less able to meet its interest payments from its EBIT in 2014.

Option A is incorrect because incurring less debt in the revolving line of credit would result in a higher times-interest-earned ratio, not a lower one.

Option C is incorrect because paying less interest on debt would result in a higher times-interest-earned ratio, not a lower one.

Option D is incorrect because an improvement in the debt-paying ability would result in a higher times-interest-earned ratio, not a lower one.

Option B is the correct answer because incurring more debt, specifically in its revolving line of credit, would increase the interest expense and reduce the EBIT, which would result in a lower times-interest-earned ratio.

The Times-Interest- Earned Ratios of Benin Inc