Question

Thomson Trucking has $23 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 6%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

EBIT = Basic Earning power ratio * Total assets = 0.20 * $23 billion = $4.6 billion

Net income = Total assets * Return on assets (ROA) = $23 billion * 0.06 = $1.38 billion

Earnings before tax = Net Income / (1 - Tax rate) = $1.38 billion / (1 - 0.40) = $2.3 billion

Interest Expence = EBIT - EBT = $4.6 billion - $2.3 billion = $2.3 billion

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

Times-interest-earned (TIE) ratio = $4.6 billion / $2.3 billion

Times-interest-earned (TIE) ratio = 2.00x