Question

Dome Inc has total assets of $30mi. Its basic earning power (BEP) ratio is 25%, its ROA is 15%, and its tax rate is 34%. What is the firm's TIE ratio?

Answer 1

EBIT = Basic Earning power ratio * Total assets = 0.25 * $30 million = $7.5 million

Net income = Total assets * Return on assets (ROA) = $30 million * 0.15 = $4.5 million

Earnings before tax = Net Income / (1 - Tax rate) = $4.5 million / (1 - 0.34) = $6.81818 million

Interest Expence = EBIT - EBT = $7.5 million - $6.81818 million = $0.68182 million

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

Times-interest-earned (TIE) ratio = $7.5 million / $0.68182 million

Times-interest-earned (TIE) ratio = 11x