A company's income before interest expense and taxes is $250,000 and its interest expense is $100,000. Its times interest earned ratio is .4.
$250,000/$100,000 = 2.5

Question

Quizplus · Accepted Answer

The correct formula for calculating the times interest earned ratio is EBIT/Interest Expense. Using the given numbers, the calculation would be:

$250,000/$100,000 = 2.5

This means that for every $1 of interest expense, the company earns $2.50 of income before interest and taxes. However, the ratio is not .4 as stated in the question. To calculate the actual times interest earned ratio, we need to invert the calculation:

Interest Expense/EBIT = $100,000/$250,000 = 0.4

Therefore, the correct times interest earned ratio is 0.4, not 2.5.

A Company's Income Before Interest Expense and Taxes Is $250,000