Question

XYZ Inc. has the following income statement as of 2014. Sales$7,035,000 Cost of goods sold (5,875,000)...

XYZ Inc. has the following income statement as of 2014.

Sales$7,035,000 Cost of goods sold (5,875,000) Other expenses (550,000) EBITDA 609,000 Depreciation (116,000) EBIT 492,000Interest expense (70,000)EBT 422,000Tax (40%) (169,000)Net Income $253,000

11. Calculate the Times-Interest-Earned (TIE) ratio of this company. If the industry

average of this is 6.3x, what is your evaluation for this company’s TIE ratio? (Closest

number)

a. 6.2 times; good

b. 6.2 times; bad

c. 7.03times; good

d. 7.03times; bad

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Homework Answers

Answer #1

The times interest earned is computed as shown below:

= EBIT / Interest expense

= $ 492,000 / $ 70,000

= 7.03 times Approximately

The times interest earned ratio is an indicator which states that how many times does the company has operating profit as compared with the interest expenses. The higher the times interest earned ratio is for a company, the better it is.

Since the times interest earned ratio of 7.03 times is greater than the industry's average of 6.3x, it implies that the company's times interest earned ratio is better.

So, the correct answer is option c.

Feel free to ask in case of any query relating to this question

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