Question

Thomson Trucking has $12 billion in assets, and its tax rate is 25%. Its basic earning power (BEP) ratio is 17%, and its return on assets (ROA) is 7.25%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

ROA=Net income/Total assets

Net income=(12*7.25%)=$0.87 billion

BEP ratio=EBIT/Total assets

EBIT=(12*17%)=$2.04 billion

(EBIT-interest expense)(1-tax rate)=Net income

(2.04-interest expense)(1-0.25)=0.87

(2.04-interest expense)=0.87/0.75

interest expense=2.04-(0.87/0.75)

=$0.88 billion

TIE=EBIT/interest expense

=2.04/0.88

=2.32(Approx)