In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with a face value of $1 million, market value of $.92 million, and a coupon rate of 8%. What is the firm's times interest earned ratio

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Business

Cubby

17 August, 05:33

In the past year, TVG had revenues of $3 million, cost of goods sold of $2.5 million, and depreciation expense of $200,000. The firm has a single issue of debt outstanding with a face value of $1 million, market value of $.92 million, and a coupon rate of 8%. What is the firm's times interest earned ratio

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Judith Leonard · Answer 1

Times Interest Earned Ratio = 3.75

Explanation:

The firm has a debt outstanding of face value $1 million and the coupon rate is 8%.

=> The interest expense of the company could be calculate as following:

interest expense = face value * rate = 1 million x 8% = $0.08 million = $80,000

We have, earnings before tax and interest expense of the firms are:

Earnings before tax and interest = Revenue - Cost - Depreciation expense = 3 million - 2.5 mllion - 200,000 = $300,000

The times interest earned ratio of a company can be calculated with the following formula:

Times Interest Earned Ratio = (Earnings before Tax and Interest) / Interest Expense

= 300,000/80,000 = 3.75

Times Interest Earned Ratio = 3.75