   Chapter 4, Problem 12P Fundamentals of Financial Manageme...

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

Solutions

Chapter
Section 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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