For the most recent year, a company had sales of $250,000, cost of goods sold of $80,000, depreciation of $27,000, and additions to retained earnings of $33,360. The company has 20,000 shares of common stock outstanding and they paid dividends of $1.50 per share. Assuming a 34% tax rate, what was times interest earned?

I got 39.33 for interest earned is it correct? Can you please explain how you got your answer


Times Interest Earned = EBIT / Interest
EBIT = Operating Income + Interest
Operating Income = Gross Income - Expenses – Depreciation

I got 1,511,420 for EBIT and 113,000 for operating income

1 ½ million in EBIT, on sales of just 250,000?

Take a top-down approach to find EBIT. Assuming the company's entire income statement consists solely of Sales, COGS, Depreciation, Interest Expense, and Tax Expense, then EBIT is just those first three items.

To get the Interest Expense, take a bottom-up approach.

• First, their after-tax net earnings must be the sum of the total dividends they paid, plus the amount they added to retained earnings.

• Next, their pre-tax earnings would be the after-tax earnings (computed previously), divided by the amount (1 - the tax rate).

• Finally, the difference between their EBIT and their pre-tax earnings must be their Interest Expense.

Back to you to fill in those blanks.

Quote:

---

Originally Posted by ArcSine

1 ½ million in EBIT, on sales of just 250,000?

Take a top-down approach to find EBIT. Assuming the company's entire income statement consists solely of Sales, COGS, Depreciation, Interest Expense, and Tax Expense, then EBIT is just those first three items.

To get the Interest Expense, take a bottom-up approach.

• First, their after-tax net earnings must be the sum of the total dividends they paid, plus the amount they added to retained earnings.

• Next, their pre-tax earnings would be the after-tax earnings (computed previously), divided by the amount (1 - the tax rate).

• Finally, the difference between their EBIT and their pre-tax earnings must be their Interest Expense.

Back to you to fill in those blanks.

---

I got Interest Earned Equals 3.042553191 is that right?

Ebit=143,000 (250000-80000-27000)
Operating Income=113,000 (250000-80000-27000-30000)
After Tax=63360 ((20000*1.5)+33360)
Pre Tax=96,000 (63360/(1-0.34))
Interest Expense=47000 (143000-96000)

Quote:

---

Originally Posted by ArcSine

1 ½ million in EBIT, on sales of just 250,000?

Take a top-down approach to find EBIT. Assuming the company's entire income statement consists solely of Sales, COGS, Depreciation, Interest Expense, and Tax Expense, then EBIT is just those first three items.

To get the Interest Expense, take a bottom-up approach.

• First, their after-tax net earnings must be the sum of the total dividends they paid, plus the amount they added to retained earnings.

• Next, their pre-tax earnings would be the after-tax earnings (computed previously), divided by the amount (1 - the tax rate).

• Finally, the difference between their EBIT and their pre-tax earnings must be their Interest Expense.

Back to you to fill in those blanks.

---

By the way if u get a chance and understand the problem please help me with my other homework question

https://www.askmehelpdesk.com/finance-accounting/check-homework-about-statements-cash-flows-701039.html

Quote:

---

I got Interest Earned Equals 3.042553191 is that right?

---

Spot on, nice job!

Couple o' tips: For one, you don't want to lose points for terminology. It's Times Interest Earned. Second, nobody's as big a fan of precision as I am, but you should probably round it down to something like 3.04 in your final answer. When dealing with ratios of this type, you're already working with inputs which tend to be rounded numbers themselves. Hence carrying the ratio's result to so many decimal places gives a false sense of precision.

Nevertheless, good job.

Re your other question, I've unfortunately got to sign off for a while, but hopefully someone else'll come along to lend a hand.