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A company's net income after tax was $400,000 for its most recent year
A company's net income after tax was $400,000 for its most recent year. The company's income statement included Income Tax Expense of $140,000 and Interest Expense of $60,000. At the beginning of the year the company's stockholders' equity was $1,900,000 and at the end of the year it was $2,100,000.
14. What is the times interest earned for the company?
15. What is the after-tax return on stockholder's equity for the year?
Expert Solution
14). Computation of the time interest earned ratio:-
Earnings before interest and taxes (EBIT) = Net income + Income tax expenses + Interest expenses
= $400,000 + $140,000 + $60,000
= $600,000
Times interest earned ratio = EBIT / Interest expenses
= $600,000 / $60,000
= 10. times
15). Computation of the after-tax return on stockholder's equity:-
Average stockholder's equity = (Beginning stockholder's equity + Ending stockholder's equity) / 2
= ($1,900,000 + $2,100,000) / 2
= $4,000,000 / 2
= $2,000,000
After tax return on equity = Net income after tax / Average stockholder's equity
= $400,000 / $2,000,000
= 20%
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