Question

Consolidated Industries has total interest charges of $20,000 per year. Sales of $2 million generated an operating income of $220,000 and an after-tax profit of 6% of sales. The firm has a marginal tax rate of 40%. What is the firm's times-interest-earned ratio? Seleccione una:

a. 10
b. 13
c. 12
d. 11

Answer 1

The times-interest-earned ratio for Consolidated Industries is calculated by dividing the operating income of $220,000 by the annual interest charges of $20,000, resulting in a ratio of 11.

Step-by-step explanation:

The Times-Interest-Earned (TIE) ratio measures a company's ability to meet its interest obligations based on its operating income. To calculate the TIE ratio, we need to divide the operating income by the company's annual interest expenses.

Consolidated Industries has an operating income of $220,000 and total interest charges of $20,000 per year. Therefore, the TIE ratio is calculated as follows:

$220,000 operating income ÷ $20,000 interest charges = 11

Thus, the firm's times-interest-earned ratio is 11.