Question

MPI Incorporated has $8 billion in assets, and its tax rate 35%. Its basic earning power (BEP) ratio is 8% and its return on assets (ROA) is 5%. What is MPI's times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Return on assets = Net Income / Total assets

5% = Net Income/ 8 billion

Net Income = $8 billion * 5% = 400,000,000

Basic Earning Power = EBIT / Total Assets

8% = EBIT / $8 billion

EBIT = $640,000,000

EBT = Net Income / 1 - Tax rate = $400,000,000 / 1- 0.35 = $615,384,615.4

Interest portion = EBIT - EBT = $640,000,000 - $615,384,615.4 = 24,615,285

Times interest earned ratio = EBIT / Interest =  $640,000,000/ 24,615,285 = 26 times

Any doubt please comment.