Asked by Tyler Bergh on Jun 13, 2024
Verified
A Toronto firm has a times interest earned ratio of 2.7 times. This means:
A) The firm generated enough cash to cover its interest expense 2.7 times.
B) The firm has sufficient EBIT to cover its interest expense 2.7 times.
C) The interest expense of this firm exceeded earnings before taxes by 2.7 times.
D) The net income of this firm is sufficient to cover its interest expense 2.7 times.
E) The firm earned $1 in EBIT for every $2.70 it paid out in interest.
Times Interest Earned
A financial ratio that measures a company’s ability to meet its interest payments on outstanding debt.
EBIT
EBIT, or Earnings Before Interest and Taxes, represents a company's profit figure that does not take into account expenses stemming from interest and income taxes.
Interest Expense
The cost incurred by an entity for borrowed funds over a period, typically presented in the income statement.
- Evaluate a company's financial health in terms of liquidity, solvency, and profitability by examining specific ratios.
Verified Answer
JD
Jefferson De GuzmanJun 17, 2024
Final Answer :
B
Explanation :
The times interest earned ratio, also known as the interest coverage ratio, measures how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT). Therefore, if a Toronto firm has a times interest earned ratio of 2.7 times, it means the firm has sufficient EBIT to cover its interest expense 2.7 times.
Learning Objectives
- Evaluate a company's financial health in terms of liquidity, solvency, and profitability by examining specific ratios.