Question

Which of the following statements is incorrect?

a) Times Interest Earned = EBIT / Interest. Expense.
b) The net operating profit after taxes (NOPAT) = EBIT / (1 - Tax Rate).
c) In general, higher fixed asset turnover ratios indicate more efficient usage of the assets and are therefore preferred to lower ratios.
d) Operating Profit Margin = Net Operating Profit / Sales.
e) All the answers are correct except one.

Answer 1

The incorrect statement is a) Times Interest Earned = EBIT / Interest Expense.

Step-by-step explanation:

The incorrect statement is a) Times Interest Earned = EBIT / Interest Expense. the correct formula for Times Interest Earned (sometimes called Interest Coverage Ratio) is EBIT / Interest Expense. It measures a company's ability to cover its interest expense with its earnings before interest and taxes. Higher values indicate a higher ability to cover interest payments.

For example, let's say a company has an EBIT of $1,000,000 and an interest expense of $200,000. The Times Interest Earned ratio would be 5 ($1,000,000 / $200,000), indicating that the company's earnings are 5 times greater than its interest expense. the other statements b) The net operating profit after taxes (NOPAT) = EBIT / (1 - Tax Rate), c) In general, higher fixed asset turnover ratios indicate more efficient usage of the assets and are therefore preferred to lower ratios, and d) Operating Profit Margin = Net Operating Profit / Sales are all correct.