Calculate the times interest earned ratio for LaTonya\'s Flop Shops, Inc. using

Question

Calculate the times interest earned ratio for LaTonya's Flop Shops, Inc. using the following information. Sales = $1.19 million, cost of goods sold = $624,500, depreciation expense = $97,800, addition to retained earnings = $100,200, dividends per share = $1, tax rate = 30%, and number of shares of common stock outstanding = 59,800. LaTonaya's Flop Shops has no preferred stock outstanding. (Round your answer to 2 decimal places.)

Explanation / Answer

solution Net sales (all credit) $1,000,000 Less: Cost of goods sold 600,000 Gross profits step 4. $400,000 Less: Depreciation 100,000 Earnings before interest and taxes (EBIT) step 5. $300,000 Less: Interest step 6. $75,000 Earnings before taxes (EBT) step 3. $225,000 Less: Taxes Net income step 2. $157,500 Less: Common stock dividends step 1. $60,000 Addition to retained earnings $97,500 Step 1. Common stock dividends = $1 x 60,000 = $60,000 Step 2. Net income = Common stock dividends + Addition to retained earnings = $60,000 + $97,500 = $157,500 Step 3. EBT (1 – tax rate) = Net income => EBT = Net income/(1 – tax rate) = $157,500/(1-.3) = $225,000 Step 4. Gross profits = Net sales – Cost of goods sold = $1,000,000 – $600,000 = $400,000 Step 5. Gross profits – Depreciation = EBIT = $400,000 - $100,000 = $300,000 Step 6. EBIT – Interest = EBT => Interest = EBIT - EBT = $300,000 - $225,000 = $75,000 => Times interest earned = $300,000/$75,000 = 4.00 times

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