Which formula yields a cash × interest earned ratio of 11?
Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 yields a cash times interest earned ratio of 11.
This formula calculates the cash times interest earned ratio by dividing cash before interest and taxes by the cash paid for interest. In this case, using $11,000 divided by $1,000 results in a ratio of 11, indicating strong coverage of interest expenses by cash earnings.
This formula calculates a different ratio, specifically the cash flow coverage of income taxes, not interest. Dividing $11,000 by $1,000 yields a cash coverage ratio of 11, but it does not assess the company's ability to cover interest expenses, which is the focus of the question.
Using this formula provides a measure of how well cash before interest and taxes covers cash outflows for acquisitions. Dividing $11,000 by $1,000 results in a ratio of 11, but again, it does not relate to interest payments, making it irrelevant to the cash times interest earned calculation.
This formula gives insight into the relationship between cash flow before interest and taxes and cash generated from operations. The ratio of $11,000 to $1,000 equals 11, but it does not measure interest coverage specifically, which is essential for determining the cash times interest earned ratio.
The cash times interest earned ratio specifically evaluates a company's ability to cover interest expenses with its cash earnings before interest and taxes. Among the choices, only the formula involving cash paid for interest accurately reflects this relationship, yielding a ratio of 11. The other options, while mathematically valid, do not pertain to interest coverage, thus failing to answer the question effectively.
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