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Last year, Stevens, Inc. had sales of $420,000 with a cost of goods sold of $150,000....

Last year, Stevens, Inc. had sales of $420,000 with a cost of goods sold of $150,000. The firm's operating expenses were $150,000, and its increase in retained earnings was $63,000. There are currently 24,000 common stock shares outstanding and the firm pays a $1.50 dividend per share. Assume the firm's earnings are taxes at 21%. What is the firm's times interest earned ratio?

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Answer #1

Operating Income = Sales - Cost of Goods Sold - Operating Expenses
Operating Income = $420,000 - $150,000 - $150,000
Operating Income = $120,000

Dividends = Dividend per share * Number of Shares
Dividends = $1.50 * 24,000
Dividends = $36,000

Increase in Retained Earnings = Net Income - Dividends
$63,000 = Net Income - $36,000
Net Income = $99,000

Net Income = Taxable Income * (1 - Tax Rate)
$99,000 = Taxable Income * (1 - 0.21)
Taxable Income = $125,316.46

Taxable Income = Operating Income - Interest Expense
$125,316.46 = $120,000 - Interest Expense
Interest Expense = -$5,316.46

Times Interest Earned = Operating Income / Interest Expense
Times Interest Earned = $120,000 / -$5,316.46
Times Interest Earned = -22.57 times

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