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%.

Question

Summit Builders has a market debt-equity ratio of 0.25, a corporate tax rate of 40%, and pays 7% interest on its debt. By what amount does the interest tax shield from its debt lower Summit's WACC? WACC is lowered by %. (Round to two decimal places.)

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100%

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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