Question 63

The formula yielding a cash × interest earned ratio of 11 is the cash before interest and taxes divided by cash paid for interest.

Calculating the cash × interest earned ratio involves dividing the cash before interest and taxes by the cash paid for interest. In this case, the correct formula is $11,000 / $1,000, which results in a ratio of 11.

A) Cash before interest and taxes of $11,000 / cash paid for income taxes of $1,000

This option is incorrect because it calculates a different ratio that does not relate to interest earned. The cash paid for income taxes is not relevant to the cash × interest earned ratio, which specifically requires cash paid for interest.

B) Cash before interest and taxes of $11,000 / cash paid for acquisitions of $1,000

This choice is also incorrect as it involves cash paid for acquisitions instead of interest. The ratio calculated here would not reflect the relationship between cash and interest earned, thus failing to meet the requirement of the question.

C) Cash before interest and taxes of $11,000 / cash paid for interest of $1,000

This is the correct option. By dividing $11,000 by $1,000, the result is a cash × interest earned ratio of 11. This accurately represents the relationship between cash generated before interest and the amount of interest paid, which is the focus of the question.

D) Cash before interest and taxes of $11,000 / cash from operations of $1,000

This option is incorrect because it uses cash from operations rather than cash paid for interest. The resulting ratio would not provide insight into the cash × interest earned relationship, making it irrelevant to the question.

Conclusion

Option C is definitively correct as it directly computes the cash × interest earned ratio using the appropriate parameters. Other options either misinterpret the required variables or calculate ratios that are unrelated to interest payments, thereby failing to align with the question's intent.