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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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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?

Summary Introduction

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.

Explanation

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,

Times-interest-earned (TIE) ratio=EarningbeforeinterestandtaxInterestexpenses

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.

Times-interest-earned (TIE) ratio=$1,600,000,000$266,666,666.7=5.9×

Here, time-interest-earned ratio is 5.9× .

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,

Netincome=ROA×Totalassets=5%×$16billion=$800million

Calculation of earnings before interest and tax,

Earning beforeinterest

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