Question

Grass Trucking has $12 billion in assets, and its tax rate is 40 percent. Its Basic Earning Power (BEP) ratio is 15 percent, and its return on total assets (ROA) is 5 percent. What is its times-interest-earned (TIE) ratio?

Answer 1

Basic Earning Power = EBIT / Total Assets

15% = EBIT / 12Billion

EBIT = 12 Billion * 15%

EBIT = 1.8 Billion

We also Know that,

Net Income = Return on assets * Total Assets

= 5% * 12 Billion

Net Income = 0.6 Billion or 600 Million

Interest Expense = EBIT - [Net income / ( 1 - Tax Rate)]

= 1.8 - [ 0.6 / ( 1 - 0.4)]

= 1.8 - [ 0.6 / 0.6]

= 1.8 - 1.0

Interest expense = 0.8 Billions

Times Interest Eaned ratio = EBIT / Total interest expense

= 1.8 / 0.8

= 2.25 X

Times interest earned ratio is 2.25 Times.

TIE =