Question

Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542. The tax rate is 35 percent. What is the times interest earned ratio?

a.0.88
b.1.73
c.3.09
d.5.59
e.9.09

Answer 1

The times interest earned ratio measures a company's ability to cover its interest expenses with its earnings. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. In this case, the times interest earned ratio is 7, which is not listed among the provided options.

Step-by-step explanation:

The times interest earned ratio measures a company's ability to cover its interest expenses with its earnings. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. The formula is:

Times Interest Earned Ratio = EBIT ÷ Interest Expense

In this case, we are given that EBIT is $21,680. To calculate the interest expense, we need to subtract the net income from the EBIT and multiply it by the tax rate:

Interest Expense = (EBIT - Net Income) x Tax Rate

Plugging in the values:

Interest Expense = (21,680 - 12,542) x 0.35 = 3,099.95

Now, we can calculate the times interest earned ratio:

Times Interest Earned Ratio = 21,680 ÷ 3,099.95 = 7

So, the correct answer is not listed among the options given. However, the closest option is 5.59, which is not the correct answer.