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. Times interest earned ratio = Earnings before interest and taxes ( E B I T ) 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%.

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AGG is a US multinational that manufactures specialist high tech parts in the airline engine industry. AGG is an established company with steady growth in turnover and dividends over the last 10 years. The company is undertaking a projected titled Project Big as a strategic response to the changing market scene. AGG will develop a new state of the art highly automated plant located in Cambodia which is expected to result in cost advantages if it is implemented. The details about the project are below • Initital investment has been estimated at $500m • • The annual pre tax savings in operating costs at current exchange rates has been calculated at $150m for the first four years (starting in the first year) The residual value of the project at the end of the four years is estimated to be $250m The initial investment, net of residual value, qualifies for capital allowance and can be claimed back on a straight line basis over the four years of the project. Current AGG's cost of capital is…

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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.

Times interest earned ratio=Earnings before interest and taxes(EBIT)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%.

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AGG is a US multinational that manufactures specialist high tech parts in the airline engine industry. AGG is an established company with steady growth in turnover and dividends over the last 10 years. The company is undertaking a projected titled Project Big as a strategic response to the changing market scene. AGG will develop a new state of the art highly automated plant located in Cambodia which is expected to result in cost advantages if it is implemented. The details about the project are below • Initital investment has been estimated at $500m • • The annual pre tax savings in operating costs at current exchange rates has been calculated at $150m for the first four years (starting in the first year) The residual value of the project at the end of the four years is estimated to be $250m The initial investment, net of residual value, qualifies for capital allowance and can be claimed back on a straight line basis over the four years of the project. Current AGG's cost of capital is…

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