Chapter 2, Problem 13PROB

Summary Introduction

The times interest earned ratio is used to measure the firm's ability to honor its debt obligations. It also called interest coverage ratio, which measures the proportionate value of income that can be used to cover future interest expenses.

$\text{Times interest earned ratio}=\frac{\text{Earnings before interest and taxes}\left(EBIT\right)}{\text{Interest expenses}}$

WW pays 6% interest on outstanding debt of $200,000. The firm's sales are $540,000, the net profit margin is 4%, and its tax rate is 40%.