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Analyze Aeropostale Aeropostale, Inc. (ARO) is a specially fashion retailer targeting young adults. The income before income tax expense and interest expense for four recent years follow (in millions): a. Compute the times interest earned ratio for each year. Round to one decimal place. b. Plot the four points on a graph with the year numbers on the horizontal axis, beginning with Year 1. c. Interpret the trend in the ratio from your graph. d. What happened to interest expense in Year 4? What might be the cause?

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Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169

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Chapter
Section
BuyFindarrow_forward

Corporate Financial Accounting

15th Edition
Carl Warren + 1 other
Publisher: Cengage Learning
ISBN: 9781337398169
Chapter 11, Problem 11.3MAD
Textbook Problem
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Analyze Aeropostale

Aeropostale, Inc. (ARO) is a specially fashion retailer targeting young adults. The income before income tax expense and interest expense for four recent years follow (in millions):

Chapter 11, Problem 11.3MAD, Analyze Aeropostale Aeropostale, Inc. (ARO) is a specially fashion retailer targeting young adults. , example  1

a. Compute the times interest earned ratio for each year. Round to one decimal place.

b. Plot the four points on a graph with the year numbers on the horizontal axis, beginning with Year 1.

c.    Chapter 11, Problem 11.3MAD, Analyze Aeropostale Aeropostale, Inc. (ARO) is a specially fashion retailer targeting young adults. , example  2 Interpret the trend in the ratio from your graph.

d.    Chapter 11, Problem 11.3MAD, Analyze Aeropostale Aeropostale, Inc. (ARO) is a specially fashion retailer targeting young adults. , example  3 What happened to interest expense in Year 4? What might be the cause?

a.

To determine

To Compute: Times-interest-earned ratio for each year.

Explanation of Solution

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

Determine the times-interest-earned ratio for each year.

Year 4:

Times-interest- earned ratio}=Income(Loss)beforeincometaxes+Interest expenseInterest expense=($132.3)+$12.9$12.9=($119.4)$12.9=(9.3)

Year 3:

Times-interest- earned ratio}=Income(Loss)beforeincometaxes+Interest expenseInterest expense=($221.9)+$8

b.

To determine

To plot: the graph with the four points and the years in the horizontal axis.   

c.

To determine

To interpret: the trend in the ratio from the graph.

d.

To determine

To Explain: the reason for the significant increase in the interest expense.

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Chapter 11 Solutions

Corporate Financial Accounting
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