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

EBIT = Basic Earning power ratio * Total assets = 0.20 * $17 billion = $3.4 billion

Net income = Total assets * Return on assets (ROA) = $17 billion * 0.03 = $0.51 billion

Earnings before tax = Net Income / (1 - Tax rate) = $0.51 billion / (1 - 0.35) = $0.7846 billion

Interest Expence = EBIT - EBT = $3.4 billion - $0.7846 billion = $2.6154 billion

Times-interest-earned (TIE) ratio = EBIT / Interest Expense

Times-interest-earned (TIE) ratio = $3.4 billion / $2.6154 billion

Times-interest-earned (TIE) ratio = 1.30x