Question

sales are1.53 million, cost of goods sold is 615000, depriciation, expense is 153,000, other operating expenses is $303,000 addition to retained earnings is 145,700,dividends per share is $1,tax rate is 30 percent,and number of shares of common stock outstanding is 93,000 Latonya's Flop Shops has no preferred stock outstanding.

use above info to calculate the times interest earned ratio for Latonya's Flop Shops, inc (rd your ans to 2 decimal places

Answer 1

Solution :

As per the information given in the question we have

Addition to Retained earnings = $ 145,700 ;

Dividends per share = $ 1   ;   Number of shares of common stock outstanding = 93,000

Dividends paid = Dividends per share * Number of shares of common stock outstanding

= $ 1 * 93,000

= $ 93,000

Thus Dividends paid = $ 93,000

We know that

Net Income after tax – Dividend paid = Addition to retained earnings

Applying the available information in the equation we have

Net Income after tax – $ 93,000 = $ 145,700

Net Income after tax = $ 145,700 + $ 93,000   = $ 238,700

We know that Net Income after tax is a calculated as follows :

Net Income after tax = [ Sales – Cost of goods sold – Operating expenses – Depreciation – Interest Expense ] * ( 1 – Tax rate )

As per the information available we have

Net Income after tax = $ 238,700 ;     Sales = $ 1,530,000 ; Cost of goods sold = $ 615,000   ;

Other operating expenses = $ 303,000 ; Depreciation Expense = $ 153,000 ;   Tax rate = 30 % = 0.30

To find Interest Expense ; Let the Interest expense be “ X “

Applying the above information in the Net Income equation we have

$ 238,700 = [ $ 1,530,000 - $ 615,000 - $ 303,000 – $ 153,000 - X ] * ( 1 – 0.30 )

$ 238,700 = [ $ 1,530,000 - $ 615,000 - $ 303,000 – $ 153,000 - X ] * 0.70

$ 238,700 = [ $ 459,000 – X ] * 0.70

$ 238,700 / 0.70 = [ $ 459,000 – X ]

$ 341,000 = $ 459,000 – X

X = $ 459,000 - $ 341,000 = $ 118,000

Thus the Interest Expense = $ 118,000

Calculation of EBIT :

The formula for calculating the EBIT

= ( Sales - Cost of goods sold – Operating expenses – Depreciation )

= $ 1,530,000 - $ 615,000 - $ 303,000 – $ 153,000

= $ 459,000

Thus the EBIT = $ 459,000

Calculation of Times Interest Earned Ratio :

We know that Times Interest Earned Ratio is calculated using the formula :

= EBIT / Interest Expense

Applying the available information in the formula we have

= $ 459,000 / $ 118,000

= 3.889831

= 3.89 ( when rounded off to two decimal places )

Thus the Times Interest Earned Ratio = 3.89