Neelty Corporation has interest expense of $16,000, sales of $600,000, a tax rate of 30%, and after-tax net income of $56,000. The company's times interest earned ratio is closest to:
A) 6.0
B) 5.0
C) 4.5
D) 3.5

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated as EBIT (Earnings Before Interest and Taxes) divided by interest expense. To find EBIT, we start with after-tax net income and work backwards. After-tax net income is $56,000, which is after a 30% tax. To find earnings before taxes (EBT), we divide the after-tax income by (1 - tax rate): $56,000 / (1 - 0.30) = $56,000 / 0.70 = $80,000. To find EBIT, we add back the interest expense to EBT: $80,000 + $16,000 = $96,000. Finally, we divide EBIT by the interest expense to get the times interest earned ratio: $96,000 / $16,000 = 6.0.

Neelty Corporation Has Interest Expense of $16,000, Sales of $600,000