Question

Thomson Trucking has $13 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 18%, and its return on assets (ROA) is 7%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Step 1: Calculate EBIT

To calculate EBIT, we need to use the following formula for BEP:

BEP = EBIT/Total Asstes

Substituting values in the above formula, we get,

18% = EBIT/13,000,000,000

Rearranging values, we get,

EBIT = 13,000,000,000*18% = $2,340,000,000

_____

Step 2: Calculate Net Income and EBT

The value of net income is arrived as below:

ROA = Net Income/Total Assets

Substituting values in the above formula, we get,

7% = Net Income/13,000,000,000

Rearranging values, we get,

Net Income = 13,000,000,000*7% = $910,000,000

Now, we can calculated EBT as below:

EBT = Net Income/(1 - Tax Rate) = 910,000,000/(1 - 40%) = $1,516,666,666.67

_____

Step 3: Calculate Interest Amount

The value of interest is calculated as follows:

Interest = EBIT - EBT = 2,340,000,000 - 1,516,666,666.67 = $823,333,333.33

_____

Step 4: Calculate Times-Interest Earned Ratio

The times-interest-earned (TIE) ratio is calculated as below:

Times-Interest-Earned (TIE) Ratio = EBIT/Interest = 2,340,000,000/823,333,333.33 = 2.84 (answer)