Which of the outcomes represented in the following table would result from a company’s retirement of debt with excess cash?


Total Assets Turnover Ratio

Following Period’s Times Interest Earned Ratio

Answer (A) is correct. Because total assets will decline without any impact on sales, the total assets turnover ratio (sales ÷ total assets) will increase. In addition, a reduced debt level should cause a reduction in annual interest payments, so the times interest earned ratio [(net income + interest + taxes) ÷ interest] should increase.