Question

Thomson Trucking has $25 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 19%, 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

Calculation of Times Interest Earned Ratio (TIE)

Step-1, Calculation of Earnings Before Interest and Tax (EBIT)

Basic Earning Power (BEP) = EBIT / Total Assets

0.19 = EBIT / $25 Billion

EBIT = $25 Billion x 0.19

EBIT = $4.75 Billion

Step-2, Calculation of Net Income

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

0.05 = Net Income / $25 Billion

Net Income = $25 Billion x 0.05

Net Income = $1.25 Billion

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

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

= $1.25 Billion / (1 – 0.40)

= $1.25 Billion / 0.60

= $2.08 Billion

Step-4, Calculation of Interest Expenses

Interest Expenses = EBIT – EBT

= $4.75 Billion - $2.08 Billion

= $2.67 Billion

Step-5, Calculation of Times Interest Earned Ratio (TIE)

Times Interest Earned Ratio (TIE) = EBIT / Interest Expenses

= $4.75 Billion / $2.67 Billion

= 1.78 Times

“Hence, the Times Interest Earned Ratio (TIE) will be 1.78 Times”