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Arch Coal: Times interest earned Arch Coal, Inc. is a major coal mining company in the United States. Condensed income statement information for three recent years follows (in millions): Year 3 Year 2 Year 1 Revenues $2,937 $ 3,014 $ 3,768 Costs and expenses 3,087 3,677 4,52$ Loss from operations $ (150) $ (663) $ (757) Interest expense (net) 383 375 312 Loss before income taxes $ (533) $(1,038) $(1,069) A. Compute the times interest earned ratio for the three years. (Round to one decimal place.) B. How would you interpret a negative ratio? C. Is the trend improving or deteriorating?

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Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535

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Section
BuyFindarrow_forward

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535
Chapter 11, Problem 11.2ADM
Textbook Problem
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Arch Coal:Times interest earned

Arch Coal, Inc. is a major coal mining company in the United States. Condensed income statement information for three recent years follows (in millions):

Year 3 Year 2 Year 1
Revenues $2,937 $ 3,014 $ 3,768
Costs and expenses 3,087 3,677 4,52$
Loss from operations $ (150) $ (663) $ (757)
Interest expense (net) 383 375 312
Loss before income taxes $ (533) $(1,038) $(1,069)

A. Compute the times interest earned ratio for the three years. (Round to one decimal place.)

B. How would you interpret a negative ratio?

C. Is the trend improving or deteriorating?

A.

To determine

Times-Interest-Earned ratio: It is the ratio that quantifies a business ability to pay interest expense. It is calculated as shown below:

Times-interest-earned ratio}=Incomebeforeincometax+Interest expenseInterest expense

To Compute: Times-interest-earned ratio for the three years.

Explanation of Solution

Determine the times-interest-earned ratio for three years.

Year 1:

Loss before income taxes = ($533 million)

Interest Expense = $383 million

Times-interest- earned ratio}=Lossbeforeincometaxes+Interest expenseInterest expense=($533)+$383$383=($150)$383=(0.4)

Year 2:

Loss before income taxes = ($1,038 million)

Interest Expense = $375 million

Times-interest- earned ratio}=Lossbeforeincometaxes+Interest expenseInterest expense

B.

To determine

To explain: the interpretation of a negative ratio.

C.

To determine

To explain: whether the trend is improving or deteriorating.

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Corporate Financial Accounting
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