Question

Thomson Trucking has $17 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 3%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

- Basic earning power(BEP) = EBIT/Total Assets

0.20 = EBIT/$17 billion

EBIT = $3.4 billion

- Return on Assets = Net Income/Total Assets

0.03 = Net Income/$17 billion

Net Income = $0.51 billion

- Income Before Tax = Net Income/(1-Tax Rate)

Income Before Tax = $0.51 billion/(1-0.35)

Income Before Tax = $0.784615 billion

- Interest expenses = EBIT - Income Before Tax

Interest expenses = $3.4 billion - $0.784615 billion

Interest expenses = $ 2.615385 billion

- Times- Interest earned(TIE) Ratio = EBIT/Interest expenses

TIE Ratio = $3.4 billion/$2.615385 billion

TIE Ratio = 1.30 times

So, its times-interest-earned (TIE) ratio is 1.30 times