Question

MPI Incorporated has $8 billion in assets, and its tax rate is 35%. 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.

Answer 1

Times interest earned ratio = Earnings Before Interest and taxes / Interest expense

Step1: Computation of EBIT.

Basic earning power ratio = EBIT / Total Assets

EBIT = Total Assets * Basic earning power ratio

EBIT = $8,000,000,000 * 12%

EBIT = $960,000,000

Step 2: calculation of Interest expense.

ROA = Net income / Total assets

Net Income = $8,000,000,000 * 3% = $240,000,000

EBT = Net income / (1 - T) = $240,000,000 / (1 - 0.35)

EBT = $369,230,769.23

EBT = EBIT - Interest expense

Interest expense = EBIT - EBT = $960,000,000 - $369,230,769.23

Interest expense = $590,769,230.77

Step 3: Computation of Times interest earned ratio.

Times interest earned ratio = $960,000,000 / $590,769,230.77

Times interest earned ratio = 1.6249999 or 1.62 (rounded off to '2' decimals)