Answer (A) is correct . The times interest earned (interest coverage) ratio is computed by dividing the income available for paying interest (pretax, pre-interest income) by the annual interest expense. The first step is to determine the annual interest expense: First mortgage bond 9.0% ¡Á $ 5,000 = $? ?450 Debenture 10.2% ¡Á 10,000 = 1,020 Subordinated bond 12.0% ¡Á 6,000 = 720 Total interest expense $2,190 Dividing the pretax, pre-interest income of $10,000 by the $2,190 of interest expense produces an interest coverage ratio of 4.57.<
Answer (B) is incorrect because After-tax, pre-interest income of $6,400 divided by the interest expense equals 2.92 times.
Answer (C) is incorrect because Pre-tax, pre-interest income should be divided by interest expense to find the times interest earned ratio.
Answer (D) is incorrect because Pre-tax, after-interest income ($7,810) divided by $2,190 equals 3.57 times.
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The annual coverage of the firm’s debt is
