2) The times-interest-earned ratio is also called the short interest ratio.

 

3) A high interest-coverage ratio indicates a business's difficulty in paying interest expense.

 

4) The times-interest-earned ratio is calculated as:

A) earnings before interest and tax divided by interest expense.

B) profit before tax divided by interest expense.

C) net income divided by interest expense.

D) income tax expense plus interest expense divided by interest expense.

 

5) The information related to interest expense of Stereo Music is given below:

Net income	$255,000
Income tax expense	102,000
Interest expense	65,000

 

Based on the above data, which of the following is the interest coverage ratio?

A) 4.14 times

B) 3.92 times

C) 6.49 times

D) 4.92 times

 

6) The times-interest- earned ratios of Benin Inc. are 20.56 and 7.35 for the years 2013 and 2014, respectively. Which of the following can be the possible reason for such a change?

A) Benin Inc. incurred less debt specifically in its revolving line of credit.

B) Benin Inc. incurred more debt specifically in its revolving line of credit.

C) Benin Inc. paid less interest in its revolving line of credit.

D) Benin Inc.'s debt-paying ability increased.

 

7) The times-interest-earned ratios of four companies are given below:

Forge Corp.	8.9
Fellow Inc.	9.2
Stacy Corp.	6.7
Bennett Inc.	13.5

Which of the above companies have the highest debt-paying ability?

A) Forge Corp.

B) Fellow Inc.

C) Stacy Corp.

D) Bennett Inc.

 

8) Which of the following statements about the times-interest-earned ratio is true?

A) A lower ratio indicates a higher debt paying ability.

B) Debt reduction leads to an increase in interest expense.

C) The times-interest-earned ratio is also called the interest-coverage ratio.

D) The times-interest-earned ratio is calculated by dividing gross income by interest expense.

9) The information related to Stereo Music is given below:

	Year ended December 31, 2012	Year ended December 31, 2013
Net Income	$81,510	$210,570
Income Tax Expense	55,910	103,505
Interest Expense	6,595	59,505

Calculate the times-interest-earned ratio for each year and also state the percentage change in the ratio.

10) Ferro Inc. signed a 200-day, 5%, $5,000 note on April 1, 2014, and that this was the only note payable for the company. Calculate the times-interest-earned ratio of Ferro Inc. if its operating income for the year ending December 31, 2014, amounts to $4,300. Assume a tax rate of 20%.