What is Babcock's times interest earned, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

Question

Quizplus · Accepted Answer

Times interest earned (TIE) is calculated by dividing earnings before interest and taxes (EBIT) by interest expense.

First, we need to calculate EBIT:

Net profit margin = Net Income / Sales 
0.06 = Net Income / $220,000 
Net Income = $13,200

EBIT = Net Income + Interest Expense + Taxes 
$13,200 = EBIT - $20,000 - (0.4 * EBIT) 
$13,200 = 0.6 EBIT - $20,000 
EBIT = $55,000

The interest expense is given as $20,000.

TIE = EBIT / Interest expense 
TIE = $55,000 / $20,000 
TIE = 2.75

Therefore, the times interest earned for Babcock is 2.75, which is not one of the answer choices. However, closest to this value is choice C) 2.1.

What Is Babcock's Times Interest Earned, If Its Total Interest