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.

Question

Quizplus · Accepted Answer

The times interest earned ratio is calculated by dividing the income before interest and taxes (EBIT) by the interest expense. In this case, the calculation would be 250,000 / 100,000 = 2.5. A times interest earned ratio of .4 is impossible because anything below 1 means that the company is not generating enough EBIT to cover its interest expense. Therefore, the answer must be false.

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