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In the answer, Wiley added back $1 million in interest expense to net income. Shouldn’t you add depreciation instead of interest expense? According to Investopedia, the equation for EBIT is: EBIT = Revenue – COGS- Operating Expenses – Depreciation & Amortization
35. A company has income after tax of $5.4 million, interest
expense of $1 million for the year, depreciation expense of
$1 million, and a 40% tax rate. What is the company’s times interest-
earned ratio?
a. 5.4
b. 6.4
c. 7.4
d. 10.0
35. (d) The requirement is to calculate the times interest earned. Answer (d) is correct because times interest earned is equal to earnings before taxes and interest divided by interest expense, or
10.0 = [$5.4 million income after interest and taxes/ (1 – .04 tax rate) + $1 million interest expense]/$1 million interest expense.
Answers (a), (b), and (c) are
incorrect because they are incorrect computations of the times
interest earned.
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