Question

(23) Moss Motors has $147 million in assets, and its tax rate is 40%. The company's basic earning power (BEP) ratio is 46%, and its return on assets (ROA) is 9%. What is Moss' times-interest-earned (TIE) ratio?

0.29

1.48

0.48

1.67

0.23

Answer 1

Basic earning power = Earnings before interest and taxes ( EBIT ) / Total assets

46% = EBIT / $147 million

ÉBIT = 46% * $147 million

EBIT = $67.62 million

Return on assets = Net income / Total assets

9% = Net income / $147 million

Net income = $147 million * 9% = $13.23 million

Income before tax = Net income / ( 1 - Tax% ) = $13.23 million / ( 1 - 40% ) = $22.05 million

EBIT - Interest expense = Income before tax

$67.62 million - Interest expense = $22.05 million

Interest expense = $67.62 million - $22.05 million = $45.57 million

Times interest earned = EBIT / Interest expense = $67.62 million / $45.57 million = 1.48