A company's income before interest expense and income taxes in Year 1 and Year 2 is $487,500 and $427,000, respectively. Its interest expense was $125,000 for both years. Calculate the company's times interest earned ratio, and comment on its level of risk.
What will be an ideal response?
Year 1: 3.9; Year 2: 3.4
Risk analysis: The income before interest expense has decreased, but the interest expense appears fixed. Consequently, the company's level of risk has increased over the 2-year period.
Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest Expense
Times Interest Earned Ratio = $487,500/$125,000 = 3.9 (Year 1)
Times Interest Earned Ratio = $427,000/$125,000 = 3.4 (Year 2)
You might also like to view...
Which of the following is one of the traits of a credible leader identified by Kouzes and Posner?
A. Competent B. Relationship-oriented C. Competitive D. Extroverted E. Driven
At production levels beyond the breakeven point,
a. fixed costs are not recovered. b. profit is negative. c. variable costs are zero. d. profit is positive.
What is survey levelling?
What will be an ideal response?
Stakeholders who possess both power and urgency but may use their power to coerce are considered:
a. dominant stakeholders b. dangerous stakeholders c. dependent stakeholders d. definitive stakeholders