Question

Thomson Trucking has $18 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 17%, and its return on assets (ROA) is 3%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places. x

Answer 1

Times Interest earned = 1.42 Times

Explanation;

Times Interest earned = EBIT / Interest

First of all let’s calculate EBIT;

EBIT = Total assets * BEP

EBIT = $18 billion * 0.17

= $3.06 billion

Now, let’s calculate Net income;

Net income = Total assets * ROA

Net income = $18 billion * 0.03

= $0.54 billion

Tax rate is given = 40%

Hence, earnings before tax (EBT) will be ($0.54 / 0.60) = $0.90 billion

Thus, Interest will be = $3.06 billion – $0.90 billion

= $2.16 billion

Times Interest earned = $3.06 billion / $2.16 billion

= 1.42 Times