Question

For the most recent year, Camargo, Inc., had sales of $570,000, cost of goods sold of $249,870, depreciation expense of $64,900, and additions to retained earnings of $77,300. The firm currently has 24,500 shares of common stock outstanding and the previous year’s dividends per share were $1.52. Assuming a 24 percent income tax rate, what was the times interest earned ratio?

Answer 1

Ans.	Time interest earned = Income before interest and taxes / Interest expenses
	$255,230 / $104,519.47
	2.44 times
	*Working Notes:
	Calculations of Income before interest and tax:
	Particulars	Amount
	Sales	$570,000
	Less: Cost of goods sold	-$249,870
	Gross margin	$320,130
	Less: Operating expenses:
	Depreciation expenses	-$64,900
	Income before interest and taxes	$255,230
	*Calculations of Total dividends:
	Dividend per share = Total dividends / Common shares outstanding
	$1.52   =   Total dividends / 24,500
	Total dividends   =   24,500 * $1.52
	Total dividends   =   $37,240
	*Calculations of Net income:
	Particulars	Amount
	Additions to retained earnings	$77,300
	Add: Total dividends paid	$37,240
	Net income after tax	$114,540
	*Calculation of net income before tax:
	Net income after tax is 76% (i.e. 1 - 0.24) of net income before tax.
	Thus, the net income before tax can be calculated by the following way:
	Net income before tax = Net income after tax / (1 - Tax rate)
	$114,540 / (1 - 0.24)
	$114,540 / 0.76
	$150,710.53
	*Calculations of Interest expenses:
	Interest expenses   = Income before interest and taxes - Net income before tax
	$255,230 - $150,710.53
	$104,519.47