Chapter 4, Problem 18P

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

TIE RATIO MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is MPI’s times-interest-earned (TIE) ratio? Summary Introduction To compute: The times-interest earned ratio. Return on Assets: It is a profitability ratio. This ratio shows profit earning capability on per dollar of assets. It shows the percentage of net income on total assets. Higher the returns on assets better the profitability. Total assets include fixed as well as current assets. Times-Interest Earned Ratio: It is the type of solvency ratio which indicates the capability of the business to repay interest and provide debt related services. It shows the relation between earnings before interest and tax (EBIT) and long-term debt. It determines the debt servicing capacity of business keeping in view fixed interest on long-term debt. Explanation Given, EBIT is$660,000,000.

Interest expense is $106,153,846.15 . The formula to calculate times interest earned is, TimesĀ InterestĀ Earned=EBITInterestĀ Expenses Substitute$660,000,000 for EBIT and $106,153,846.15 in above formula. TimesĀ InterestĀ Earned=$660,000,000$106,153,846.15=6.22% Thus, the times interest earned ratio is 6.22%. Working notes: Compute net income. Given, Total assets are$6,000,000,000.

Return on assets is 6%.

The formula of return on asset (ROA) is,

ROA=NetĀ IncomeTotalĀ ValueĀ ofĀ Asset

Substitute $6,000,000,000 for total value of assets 6% for return on assets. 6%=NetĀ Income$6,000,000,000NetĀ Income=$6,000,000,000Ć6%NetĀ Income=$360,000,000

Thus, net income is $360,000,000. Compute earnings before tax. Given, Net income is$360,000,000.

Tax rate is 35%.

The formula to calculate earnings before tax is,

EBT=NetĀ Income(1āTaxĀ Rate)

Substitute \$360,000,000 for net income and 35% for tax rate

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