Question

Mani Inc. has total assets of $80mi. It’s basic earning power (BEP) ratio is 20% it’s ROA is 12%, and it’s tax rate is 35%. What is the firm’s TIE ratio?

Answer 1

HI,

Here total asset = $80 mil.

Basic earning power = 20%

basic earning power describes earning power of business before taxes and interest paid.

Basic earning power = EBIT/total asset

EBIT = 0.2*80 = $16 mil.

ROA(return on asset) = net income/total asset

0.12 = net income/80

net income = 80*0.12 = $9.6 mil

Net Income = (EBIT-interest)*(1-tax rate)

here tax rate = 35%

9.6 = (16-interest)*(1-0.35)

9.6/0.65 = 16-interest

14.77= 16-interest

interest = $1.23 mil

TIE (times interest earned) ratio = EBIT/interest expense

TIE = 16/1.23 = 13 times

Thanks