As the financial vice president for Squamish Equipment, you have the following i

Question

As the financial vice president for Squamish Equipment, you have the following information:

Calculate Squamish's times interest earned ratio for next year assuming the firm raises $50 million of new debt at an interest rate of 7 percent.

4.35

3.66

4.96

2.73

1.49

Squamish Equipment Selected financial information Next year's exp ected net incomeafter tax but before new financing Sinking-fund payments due next year on existing debt Inter est due next year on existing debt Company tax rate Common stock price, per share Common shares outstanding $50 million $15 million $16 million 38% $%25.00 20 million

Explanation / Answer

C. 4.96

EBIT = [$50 million / (1 - 0.38)] + $16 million = $96.645 million

Interest = $16 million + 0.07($50 million) = $19.5 million

Times interest earned = $96.645 million / $19.5 million = 4.96

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