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RATIO CALCULATIONS Thomson Trucking has $16 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio?
To determine: Times-interest-earned (TIE) ratio.
Introduction:
Times-Interest-earned (TIE) Ratio:
It represents the firm’s capacity to pay its interest expenses. It is calculated by dividing the earnings before interest and tax to interest expense.
Calculated values (working note),
Earnings before interest and tax are $90 million.
Interest expenses are $8 million.
Formula to calculate times-interest-earned (TIE) ratio,
Substitute $1,600,000,000 (working note) for earnings before interest and tax and $266,666,666.7 for interest expenses (working note) in the above formula.
Here, time-interest-earned ratio is
Working note:
Given,
Total assets are $16 billion.
Tax rate is 40%.
Basic earning power ratio is 10%.
Return on assets is 5%.
Calculation of net income,
Calculation of earnings before interest and tax,
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