Question

MPI Incorporated has $4 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 9%, and its return on assets (ROA) is 5%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

What is MPI's times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Solution:

ROA=Net Income/Total assets

0.05=Net Income/$4 billion

Net Income=$4 billion*0.05

=$0.2 billion

BEP=EBIT/Total assets

0.09=EBIT/$4 billion

EBIT=$4 billion*0.09

=$0.36 billion

Net Income=(EBIT-Interest)(1-tax rate)

$0.2 billion=($0.36 billion-Interest)(1-0.35)

Interest=$0.36 billion-($0.2 billion/0.65)

=$.052308 billion

Thus,Times Interest earned ratio is;

=EBIT/Interest

=$0.36 billion/$.052308 billion

=6.88 times