Answer: 6%
Explanation:
The Times Interest Ratio is calculated by the formula;
= [tex]\frac{EBIT}{Interest}[/tex]
Earnings Before Interest and Tax (EBIT)
BEP ratio = [tex]\frac{EBIT}{Total Assets}[/tex]
EBIT = BEP ratio * Total Assets
= 16% * 2,000,000
= $320,000
Interest
(EBIT- Interest)(1- Tax rate) = Net income
EBIT - Interest = [tex]\frac{Net income}{(1- Tax rate)}[/tex]
Interest = EBIT - [tex]\frac{Net income}{(1- Tax rate)}[/tex]
Net Income = ROA * Total Assets
= 8% * 2,000,000
= $160,000
Interest = EBIT - [tex]\frac{Net income}{(1- Tax rate)}[/tex]
= 320,000 - [tex]\frac{160,000}{(1- 0.4)}[/tex]
= $53,333.33
Times Interest Ratio = [tex]\frac{EBIT}{Interest}[/tex]
= [tex]\frac{320,000}{53,333.33}[/tex]
= 6%
