Sales are $3.70 million, cost of goods sold is $550,000, depreciation expense is $140,000, other operating expenses is $290,000. addition to retained

Sales are $3.70 million, cost of goods sold is $550,000, depreciation expense is $140,000, other operating expenses is $290,000. addition to retained earnings is $1,766,625, dividends per share are $1, tax rate is 21 percent, and number of shares of common stock outstanding is 80,000. Lafonya's Flop Shops has no preferred stock outstanding.

Use the above information to calculate the times interest earned ratio for LaTonya's Flop Shops, Inc. (Round your answer to 2 decimal places.)

Interest earned ________ times

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Expert Solution

EBIT = Sales - cost of goods sold - depreciation expense - other operating expense
= $3,700,000 - $550,000 - $140,000 - $290,000
= $2,720,000

Net income = Addition to retained earnings + Dividends
= $1,766,625 + ($1 * 80,000)
= $1,846,625

EBT = Net income / (1 - tax rate)
= $1,846,625 / (1 - 21%)
= $2,337,500

Interest earned ratio = EBIT / (EBIT - EBT)
= $2,720,000 / ($2,720,000 - $2,337,500)
= $2,720,000 / $382,500
= 7.11

Interest earned ratio = 7.11 times.

Junaid answered 1 year ago

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