Question

MPI Incorporated has $12 billion in assets, and its tax rate is 25%. Its basic earning power (BEP) ratio is 12%, and its return on assets (ROA) is 3%. What is MPI's times-interest-earned (TIE) ratio? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer 1

Basic earning power = Earning before interest and tax / Total Assets

12% = EBIT / 12

EBIT = 12% * 12

EBIT = 1.44 Billions

Return on Assets = Net Income / Total assets

3% = Net Income / 12

Net Income = 12 * 3%

= 0.30 Billions

We kow that

Net income = (EBIT - Interest)* ( 1 - Tax rate)

0.30 = (1.44 - Interest) * ( 1 - 25%)

0.30 / 0.75 = (1.44 - Interest)

0.4 = (1.44 - Interest)

Interest = 1.04 Billions

Times Interest ratio = EBIT / Interest expense

= 1.44 / 1.04

= 1.384615

Times interest ratio = 1.384615