Chapter 11, Problem 14E

To determine

Times interest earned ratio: It tells the ability of a company to cover up its interest expenses of debt.

Formula:

$\begin{array}{l}\text{EBIT}\text{=}\text{Net}\text{income}\text{+}\text{interest}\text{expenses}\text{+}\text{taxes}\\ \text{Times}\text{interest}\text{earned}\text{ratio}\text{=}\frac{\text{EBIT}}{\text{Interest}\text{expenses}}\end{array}$

To determine: strongest Company to cover interest payment

Answer to Problem 14E

Solution: Company D has the strongest ability to cover interest payment. Its times earned interest ratio is 27.07 times.

Explanation of Solution

A)

$\begin{array}{l}\text{EBIT}\text{=}\text{\$115,000+}\text{\$44,000}\text{+\$35,000}\\ \text{=}\text{\$194,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$194,000}}{\text{44,000}}\\ \text{=}\text{4}\text{.41}\text{times}\end{array}$

B) $\begin{array}{l}\text{EBIT}\text{=}\text{\$110,000+}\text{\$16,000}\text{+\$50,000}\\ \text{=}\text{\$176,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$176,000}}{\text{16,000}}\\ \text{=}11.0\text{times}\end{array}$

C)

$\begin{array}{l}\text{EBIT}\text{=}\text{\$100,000+}\text{\$12,000}\text{+\$70,000}\\ \text{=}\text{\$182,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$182,000}}{\text{12,000}}\\ \text{=}15.17\text{times}\end{array}$

D)

$\begin{array}{l}\text{EBIT}\text{=}\text{\$235,000+}\text{\$14,000}\text{+\$130,000}\\ \text{=}\text{\$379,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$379,000}}{\text{14,000}}\\ \text{=}27.07\text{times}\end{array}$

E)

$\begin{array}{l}\text{EBIT}\text{=}\text{\$59,000+}\text{\$14,000}\text{+\$30,000}\\ \text{=}\text{\$103,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$103,000}}{\text{14,000}}\\ \text{=}7.36\text{times}\end{array}$

F)

$\begin{array}{l}\text{EBIT}\text{=}(\text{\$5,000)+}\text{\$10,000}\text{+\$0}\\ \text{=}\text{\$5,000}\end{array}$

$\begin{array}{l}\text{Times}\text{}\text{interest}\text{covered}\text{=}\frac{\text{\$5,000}}{\text{10,000}}\\ \text{=}0.5\text{times}\end{array}$

Conclusion

With the times earned ratio of 27.07 times, the company D is the strongest company to cover up its interest obligations.