Question

Emma's Electronics Incorporated has total assets of ​$63 million and total debt of ​$39 million. The company also has operating profits of ​$23 million with interest expenses of ​$6 million

a. What is Ellie's debt ratio?

b. What is Ellie's times interest earned?

c. Based on the information above, would you recommend to Ellie's management that the firm is in a strong enough position to assume more debt and increase interest expense to $7 million.

Answer 1

Answer:

(a) 62%

(b) 3.83 times

(c) Yes

Explanation:

(a) Ellie's debt ratio:

= Total Debt ÷ Total assets

= $39 million ÷ $63 million

= 0.62 or 62%

(b) Ellie's times interest earned ratio:

= Interest ÷ EBIT

= $23 million ÷ ​$6 million

= 3.83 times

(c) Yes, it has enough times interest ratio.

If Interest expenses increased to $7 Million, then

Company could easily raise more debt to finance additional funding needs.