The times interest earned ratio is used to measure the firm's ability to honor its debt obligations. It also called interest coverage ratio, which measures the proportionate value of income that can be used to cover future interest expenses. Times interest earned ratio = Earnings before interest and taxes ( E B I T ) Interest expenses WW pays 6% interest on outstanding debt of $200,000. The firm's sales are $540,000, the net profit margin is 4%, and its tax rate is 40%.

Question

The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%. What is its TIE ratio?

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Chapter 2, Problem 13PROB

Summary Introduction

The times interest earned ratio is used to measure the firm's ability to honor its debt obligations. It also called interest coverage ratio, which measures the proportionate value of income that can be used to cover future interest expenses.

Times interest earned ratio=Earnings before interest and taxes(EBIT)Interest expenses

WW pays 6% interest on outstanding debt of $200,000. The firm's sales are $540,000, the net profit margin is 4%, and its tax rate is 40%.

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