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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

RATIO CALCULATIONS Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, 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.

Times-Interest-Earned (TIE) Ratio: It represents the firm’s capacity to pay its interest expenses. It is calculated by dividing earnings before interest and tax to interest expense.

Explanation

Solution:

Calculated values,

Earnings before interest and tax are $1.8 billion.

Interest expenses are $8 million.

Formula to calculate times-interest-earned (TIE) ratio,

Times-interest-earned (TIE) ratio=EarningbeforeinterestandtaxInterestexpenses

Substitute $90 million for earnings before interest and tax and $8 million for interest expenses.

Times-interest-earned (TIE) ratio=$1.8 billion$0.8 billion=2.25×

Here, time-interest-earned ratio is 2.25×.

Working note:

Given,

Total assets are $12 billion.

Tax rate is 40%.

Basic earning power ratio is 15%.

Return on assets is 5%.

Calculation of net income,

Netincome=ROA×Totalassets=5%×$12billion=$0.6billion=$600million

Calculation of earnings before interest and tax,

Earning beforeinterestandtax=Basicearningpower×Totalassets=15%×$12billion=$1

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