Ajax corp’s sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500. what was the firm’s tim

Question

Ajax corp’s sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500. what was the firm’s times-interest-earned (tie) ratio?
a. 8.85
b. 12.15
c. 14.75
d. 13.10
e. 11.80

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Answers ( No )

    0
    2021-11-25T20:50:57+00:00

    e. 11.80

    The “times interest earned ratio” is calculated as EBIT / Interest Charges. To get EBIT, subtract $362,500 from $510,000 to get $147,500. Divide that by the interest charge of $12,500 and you get a TIE ratio of 11.80.

    0
    2021-11-25T20:50:58+00:00

    Times interest earned ratio for Ajax corp’s: 11.8

    Further explanation

    The times interest earned ratio is the amount of income that can be used to cover interest expenses

    This figure also shows a company’s ability to make interest and debt service payments

    \large{\boxed{\bold{Times\:interest\:earned\:ratio=\frac{EBIT\:or\:Income\:before \:Interest\:+\:Taxes}{Interest\:Expense}}}}

    The higher the ratio, the better the company can pay its interest expense,

    If a company for example has a Times interest earned ratio of 5, the company’s income is 5 times greater than its annual interest expense

    Usually this is a reference from the bank / creditor to accept the loan application from the company, because the high ratio shows the company has a low risk to pay its interest payments

    Ajax corp’s sales last year were $ 510,000, its operating costs were $ 362,500, so the income before interest and income taxes is:

    EBIT = $ 510,000 – $ 362,500 = $ 147500

    interest charges = $ 12,500

    Times interest earned ratio = $ 147500 / $ 12500

    Times interest earned ratio = 11.8 (E)

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    Keywords: Times interest earned ratio, payments, taxes, expense, debt service

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