The times interest earned ratio is used to measure the firm's ability to honor its debt obligations. It also called interest coverage ratio, which measures the proportionate value of income that can be used to cover future interest expenses. Times interest earned ratio = Earnings before interest and taxes ( E B I T ) Interest expenses WW pays 6% interest on outstanding debt of $200,000. The firm's sales are $540,000, the net profit margin is 4%, and its tax rate is 40%.

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Bac Corp. has no debt but can borrow at 6.4 percent. The firm’s WACC is currently 10.2 percent, and the tax rate is 35 percent. (SHOW YOUR WORK) What is the company’s cost of equity? If the firm converts to 25 percent debt, what will its cost of equity be? If the firm converts to 50 percent debt, what will its cost of equity be? What is the company’s WACC in part (b)? In part (c)?

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Chapter 2, Problem 13PROB

Summary Introduction

The times interest earned ratio is used to measure the firm's ability to honor its debt obligations. It also called interest coverage ratio, which measures the proportionate value of income that can be used to cover future interest expenses.

Times interest earned ratio=Earnings before interest and taxes(EBIT)Interest expenses

WW pays 6% interest on outstanding debt of $200,000. The firm's sales are $540,000, the net profit margin is 4%, and its tax rate is 40%.

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