Question

During 2019, Patty's Pizza reported net income of $3,212 million, interest expense of $187 million and income tax expense of $2,372 million. During 2018, Patty’s reported net income of $2,568 million, interest expense of $183 million and income tax expense of $2,424 million. The times interest earned ratios for 2019 and 2018, respectively, are closest to:

Answer 1

The times interest earned ratios for 2019 and 2018 for Patty's Pizza are 18.15 and 15.04, respectively.

Step-by-step explanation:

The times interest earned ratio is a measure of a company's ability to meet its interest payments. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. The formula for the times interest earned ratio is:

Times Interest Earned Ratio = EBIT / Interest Expense

To calculate the times interest earned ratios for 2019 and 2018 for Patty's Pizza, we can use the given information:

For 2019:

Net Income = $3,212 million
Interest Expense = $187 million

EBIT can be calculated by adding back the interest expense to the net income:

EBIT = Net Income + Interest Expense = $3,212 million + $187 million = $3,399 million

Times Interest Earned Ratio for 2019 = EBIT / Interest Expense = $3,399 million / $187 million = 18.15

For 2018:

Net Income = $2,568 million
Interest Expense = $183 million

EBIT = Net Income + Interest Expense = $2,568 million + $183 million = $2,751 million

Times Interest Earned Ratio for 2018 = EBIT / Interest Expense = $2,751 million / $183 million = 15.04

Therefore, the times interest earned ratios for 2019 and 2018 are 18.15 and 15.04, respectively.

Answer 2

For 2019: 30.9, and for 2018: 28.3

Step-by-step explanation:

Year Net Income Interest Expense Income Tax Expense

2019 $3,212 $187 $2,372

2018 $2,568 $183 $2,424

Times interest earned ratio = earnings before interest and tax (EBIT) / interest expense

2019 EBIT = Net Income + Interest Expense + Income Tax Expense

2019 EBIT = $3,212 + $187 + $2,372

2019 EBIT = $5,771

2018 EBIT = $5,175

Now we can finally calculate the Times interest earned ratios (TIER)

2019 TIER = $5,771 / $187

2019 TIER = 30.9

2018 TIER = $5,175 /$183

2018 TIER = 28.3