Question

RATIO CALCULATIONS

Thomson Trucking has $20 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 18%, and its return on assets (ROA) is 3%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

x

Answer 1

Basic Earning Power = EBIT / Total Assets
0.18 = EBIT / $20,000 million
EBIT = $3,600 million

Return on Assets = Net Income / Total Assets
0.03 = Net Income / $20,000 million
Net Income = $600 million

Net Income = (EBIT - Interest Expense) * (1 - tax)
$600 million = ($3,600 million - Interest Expense) * (1 - 0.40)
$1,000 million = $3,600 million - Interest Expense
Interest Expense = $2,600 million

Times Interest Earned = EBIT / Interest Expense
Times Interest Earned = $3,600 million / $2,600 million
Times Interest Earned = 1.38 times