A company's income before interest expense and income taxes in 2014 and 2015 is $487,500 and $427,000, respectively. Its fixed 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?
2014: 3.9; 2015: 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.
Feedback: Times Interest Earned Ratio = Income before Interest Expense and Income Taxes/Interest
Expense
Times Interest Earned Ratio = $487,500/$125,000 = 3.9 (2014)
Times Interest Earned Ratio = $427,000/$125,000 = 3.4 (2015)
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