Question

Thomson Trucking has $10 billion in assets, and its tax rate is 30%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Step-1, Calculation of Net Income

Return on Assets (ROA) = Net Income / Total Assets

0.05 = Net Income / $10,000,000,000

Net Income = $10,000,000,000 x 0.05

Net Income = $500,000,000

Step-2, Calculation of Earnings Before Interest & Tax (EBIT)

Basic Earning Power (BEP) = Earnings Before Interest & Tax / Total Assets

0.20 = Earnings Before Interest & Tax / $10,000,000,000

Earnings Before Interest & Tax = $10,000,000,000 x 0.20

Earnings Before Interest & Tax = $2,000,000,000

Step-3, Calculation of Earnings Before Tax (EBT)

Earnings Before Tax (EBT) = Net Income / (1 – Tax Rate)

= $500,000,000 / (1 – 0.30)

= $500,000,000 / 0.70

= $714,285,714

Step-4, Calculation of Interest Expenses

Earnings Before Tax = Earnings Before Interest & Tax – Interest Expenses

$714,285,714 = $2,000,000,000 – Interest Expenses

Interest Expenses = $2,000,000,000 - $714,285,714

Interest Expenses = $1,285,714,286

Step-4, Calculation of Times-interest-earned (TIE) ratio

Times-interest-earned (TIE) ratio = Earnings Before Interest & Tax / Interest Expenses

= $2,000,000,000 / $1,285,714,286

= 1.56 Times

“Hence, the Times-interest-earned (TIE) ratio will be 1.56”