Question

What will be the impact of an increase in selling and administrative expenses, all other things being equal, to the following ratios?

Total debt to equity        Times interest earned

Select one:

a. None                               Decrease

b. None                               None

c. Decrease                         Decrease

d. Increase                          Increase

e. Decrease                         None

Answer 1

If selling and administrative expenses increases, operating profit (EBIT) and net income falls due to increase in the operating expenses like selling and administrative expenses.

Times interest Earned =EBIT/Finance Cost

With fall in the EBIT, Times Interest earned decreases.

Again, Increase or decrease in the equity depends on the dividend policy.

Total debt to equity ratio=Total liabilities/Total equity

There will not be any impact on the debt to equity ratio with increase in the selling and administrative expenses.

Option a is correct