Question

Thomson Trucking has $23 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 4%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Information provided:

Assets= $23 billion

Tax rate= 35%

Basic earning power ratio= 20%

Return on assets= 4%

Basic earning power ratio is calculated as below:

Basic earning power ratio= EBIT/ Assets

0.20= EBIT/ 23 billion

EBIT= 0.20*23 billion

         = 4.60 billion

Return on assets is calculated as below:

Return on assets= Earnings after tax/ Assets

0.04= Earnings after tax/ 23 billion

Earnings after tax= 0.04*23 billion

                                  = 0.92 billion.

Earnings after tax= Earnings before tax*(1-tax)

0.92 billion= Earnings before tax*(1-0.35

0.92 billion= Earnings before tax*0.65

Earnings before tax= 0.92 billion/ 0.6   

                                      = 1.53 billion

Interest= EBIT – EBT

               = 4.60 billion - 1.53 billion

               = 3.07 billion

Times earned interest ratio is calculated using the below formula:

TIE= EBIT/ Interest

       = 4.60 billion/ 3.07 billion

       = 1.4984 1.50.

Therefore, the times earned interest ratio is 1.50.