Question

High debt ratios that exceed the industry average may make it costly for a firm to borrow additional funds without first raising more . The times interest earned ratio measures the extent to which income can decline before the firm is unable to meet its annual payments. Its equation is:

Answer 1

The equation for Times Interest Earned Ratio = Earning before interest and taxes DIVIDED BY Interest expenses.

Step-by-step explanation:

The equation for this is EBIT ( which means the earnings of the firm before incomes and expenses ) is used in the numerator of the equation. The reason for this is that it is paid with the pre tax dollars.

The ability of the firm to pay is not affected by the tax that it has to pay to the government. Higher the debt ratio, more difficult it is for the firm to borrow money because it becomes costly for the firm to borrow.