Consolidated industries has total interest charges of $42,800 per year. sales of $2.8 million which can generate an after-tax profit of 9.4% of sales. the

Consolidated industries has total interest charges of $42,800 per year. sales of $2.8 million which can generate an after-tax profit of 9.4% of sales. the firm applies a tax rate of 34%. what is the firm’s times-interest-earned ratio?

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Expert Solution

Times-interest earned ratio is the ratio between the Earnings Before Interest and Taxes (EBIT) and interest expenses.

Sales = $2,800,000

After-tax profit = 0.094 * $2,800,000

= $263,200

Before tax profit = After-tax profit / (1 - tax rate)

= $263,200 / (1 - 0.34)

= $398,787.88

EBIT = Before tax profit + Interest (interest is added to calculate EBIT because it was deducted intially to arrive at taxable profit)

EBIT = $398,787.88 + $42,800

= $441,587.88

Times interest earned ratio = EBIT / Interest expense

= $441,587 / $42,800

= 10.32

Thus, answer is 10.32 .

Times interest earned ratio is 10.32.

Junaid answered 1 year ago

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