10 May WHAT EFFECT WILL THE LOAN AND THE INVESTMENT HAVE ON THE FIRM’S TIMES INTEREST EARNED RATIO?
(Capital structure analysis) The Garner Transport Company currently has net operating income of $500 000 and pays interest expense of $200 000. The company plans to borrow $1 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm’s net operating income by $400 000 a year.What is Garner’s times interest earned ratio before the loan is taken out and the investment is made?What effect will the loan and the investment have on the firm’s times interest earned ratio?
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