Use the following information from separate companies a through f: Net Income (Loss) Interest Expense Income Taxes a. $ 170,000 $ 91,800 $ 42,500 b. 164,600 70,778 59,256 c. 173,100 10,386 83,088 d. 144,500 53,465 60,690 e. 110,500 17,680 41,990 f. (47,600 ) 102,816 0 1. Compute times interest earned. 2. Which company indicates the strongest ability to pay interest expense as it comes due

1.

a. 3.3 times

b. 4.16 times

c. 25.67 times

d. 4.84 times

e. 9.63 times

f. 0.54 times

2.

Company c.

Explanation:

1.

  Net Income (Loss)   Interest Expense   Income Taxes  Income before I&T

a.   $170,000                  $91,800                   $42,500        $304,300

b.   $164,600                  $70,778                   $59,256        $294,634

c.   $173,100                   $10,386                    $83,088        $266,574

d.   $144,500                  $53,465                  $60,690        $258,655

e.   $110,500                   $17,680                   $41,990         $170,170

f.   ($47,600 )                  $102,816                 $0                  $55,216

Times Interest Earned

Times interest earned ratio measures the ability of the business to pay the interest on its debt. It calculates the times that company can pay its current interested payment from earning.

Times interest earned ratio = Earning before interest and tax / interest tax

a. $304,300 / $91,800 = 3.3

b. $294,634 / $70,778 = 4.16

c. $266,574 / $10,386 = 25.67

d. $258,655 / $53,465 = 4.84

e. $170,170 / $17,680 = 9.63

f. $55,216 / $102,816 = 0.54

2.

Company c. has strongest ability to pay interest expense as it comes due because it has enough earning against its interest expense. It can pay 25.67 times of current interest from current earning.

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