One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned ratio for any outstanding debt the company may have. How would a company with $100,000 of outstanding bonds paying 8.5% annually and income before interest and taxes of $50,000, calculate the interest coverage (accrual basis) ratio?
A. Income before interest and taxes divided by the interest expense.
B. Income before interest and taxes divided by carrying value of the bonds outstanding.
C. Income before interest and taxes divided by the face value on bonds.
D. Face value of the bonds divided by income before interest and taxes.
Answer: A
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