Question

Use the following information from separate companies athrough fto compute times interest earned.

Which company indicates the strongest ability to pay interest expense as it comes due? (Round ratios to

two decimals.)

Net Income (Loss) Interest Expense Income Taxes

a. \(115,000 \)44,000 $ 35,000

b. 110,000 16,000 50,000

c. 100,000 12,000 70,000

d. 235,000 14,000 130,000

e. 59,000 14,000 30,000

f. (5,000) 10,000 0

Short answer

a.4.40

b.11

c.15.17

d.27.07

e.7.35

.50

Step-by-step solution

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{\text{\$115,000\hspace{0.17em}+\hspace{0.17em}\$44,000\hspace{0.17em}+\hspace{0.17em}\$35,000}}{\text{\$44,000}}\\ \text{=\hspace{0.17em}4.40}\end{array}$

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{\text{\$110,000\hspace{0.17em}+\hspace{0.17em}\$16,000\hspace{0.17em}+\hspace{0.17em}\$50,000}}{\text{\$16,000}}\\ \text{=\hspace{0.17em}}11\end{array}$

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{\text{\$100,000\hspace{0.17em}+\hspace{0.17em}\$12,000\hspace{0.17em}+\hspace{0.17em}\$70,000}}{\text{\$12,000}}\\ \text{=\hspace{0.17em}}15.17\end{array}$

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{\text{\$235,000\hspace{0.17em}+\hspace{0.17em}\$14,000\hspace{0.17em}+\hspace{0.17em}\$130,000}}{\text{\$14,000}}\\ \text{=\hspace{0.17em}}27.07\end{array}$

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{\text{\$59,000\hspace{0.17em}+\hspace{0.17em}\$14,000\hspace{0.17em}+\hspace{0.17em}\$30,000}}{\text{\$14,000}}\\ \text{=\hspace{0.17em}}7.35\end{array}$

Calculation of times interest earned

$\begin{array}{c}\text{Times\hspace{0.17em}\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Earned=}\frac{\text{Net\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}+\hspace{0.17em}Interest\hspace{0.17em}\hspace{0.17em}Expense\hspace{0.17em}+\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}Taxes}}{\text{Interest\hspace{0.17em}\hspace{0.17em}Expense}}\\ \text{=}\frac{(\$5,000)\text{\hspace{0.17em}+\hspace{0.17em}\$10,000\hspace{0.17em}+\hspace{0.17em}\$0}}{\text{\$10,000}}\\ \text{=\hspace{0.17em}}0.50\end{array}$