Question

Use the following information from separate companies a through d:

Net Income (Loss) Interest Expense Income Taxes
a. $ 102,000 $ 37,740 $ 25,500
b. 96,600 34,776 34,776
c. 86,700 34,680 36,414
d. 105,100 7,357 50,448
Compute times interest earned.
Company numerator / denominator = ratio
/ = n/a
a $ / $ = n/a
b $ / $ = n/a
c $ / $ = n/a
d $ / $ = n/a
Options for the row under numerator and denominator: accounts receivable, cost of goods sold, currents assets, current liabilities, income before interest and taxes, interest expense, net income, net sales.
Which company indicates the strongest ability to pay interest expense as it comes due?
Company A, b, c, or d?

Answer 1

Tje correct answer is option D. Company D has the highest times interest earned ratio, indicating the strongest ability to pay interest expense as it comes due.

Step-by-step explanation:

Times interest earned is a ratio that measures a company's ability to pay its interest expense from its operating income. To calculate the times interest earned ratio, we divide the company's income before interest and taxes (EBIT) by its interest expense. The company with the highest ratio indicates the strongest ability to pay interest expense as it comes due.

Let's calculate the times interest earned ratio for each company:

Company A: $102,000 / $37,740 = 2.7

Company B: $96,600 / $34,776 = 2.8

Company C: $86,700 / $34,680 = 2.5

Company D: $105,100 / $7,357 = 14.3

Based on the calculations, Company D has the highest times interest earned ratio, indicating the strongest ability to pay interest expense as it comes due.