peteyflavor
Jan 19, 2011, 05:17 PM
Culver Inc. has earnings after interest but before taxes of $300. The company's times interest earned ratio is 7.00. Calculate the company's interest charges.
Alty
Jan 19, 2011, 10:26 PM
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arunavcd
Jan 21, 2011, 11:52 AM
Culver Inc. has earnings after interest but before taxes of $300. The company's times interest earned ratio is 7.00. Calculate the company's interest charges.
Here,
Time Interest Earned (TIE) is 7
Formula for TIE is EBIT/I
We take Interest as X for our calculation purpose:
Putting into the formula as above:
7 = [EBT 300 + X] / X
So, 7X = 300 + X
7X - X = 300
6X = 300
X = 300/6
Or, X = 50
So, Interest Charges were 50. (The Final Answer you are looking for)
Now to prove,
EBT 300
Interest 50
EBIT 350
So, Interest Cover is: EBIT/Interest
or 350/50 = 7
Clear??
Regards,
Arunav