# Times interest earned ratio, compute net income from ratios,

McMaster Inc, has a times interest earned ratio of 4.0. Based on this ratio, a creditor knows that McMasters EBIT must decline by more than____ before McMaster will be unable to cover its interest expense.

A 33%

B 40%

C 67%

D 75%

E 80%

A firm has sales of $500, total assets of $300 and a debt-equity ratio of 2. If its return on equity is 15%, what is its net income?

A $ 7.50

B $15.00

C $22.00

D $32.50

E $50.00

A firm sells 45, 000 units a year. It has an EOQ of 1,800 units. The firm offers it customers credit terms of 2/10, net 30. The firm uses a 360-day year. If both the firm and the customers operate in a manner that maximizes the benefits to themselves, the firm will have an operating cycle equal to __days.

A 24.4

B 25.0

C 35.0

D 35.6

E 44.4

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#### Solution Preview

McMaster Inc., has a times interest earned ratio of 4.0. Based on this ratio, a creditor knows that McMasters EBIT must decline by more than____ before McMaster will be unable to cover its interest expense.

A 33%

B 40%

C 67%

D 75%

E 80%

Answer: D

We will assume that the EBIT is equal to $100 and Interest expense is equal to $25.

Times interest earned = Earnings before interest and tax

Interest ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate times interest earned ratio, compute net income from ratios, and operating cycle days.