Question

Thomson Trucking has $17 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 3%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Basic earning power = EBIT / Total assets

20% = EBIT / 17 Billion

EBIT = 20 Billion * 20%

= $3.40 Billion

Return on assets = Net Income / Total assets

0.03 = Net income / 17 Billion

Net income = 17 Billion * 0.03

= $0.51 Billion

Net income before taxes = Net income / (1 - Tax rate)

= 0.51 / (1 - 0.35)

= 0.7846 Billion

Interest cost = EBIT - Net income before taxes

= 3.40 Billion - 0.7846 Billion

= 2.6154 Billion

Times Interest earned = EBIT / Interest

= 3.40 / 2.6154

= 1.30 TImes