The karson transport company currently has net operating income of

The Karson 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% 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.
a. What is Karson’s times interest earned ratio before the loan is taken out and the
investment is made?
b. What effect will the loan and the investment have on the firm’s times interest earned
ratio?

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