Question

MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 9%, and its return on assets (ROA) is 4%. What is MPI's times interest earned (TIE) ratio? Round your answer to two decimal places.

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Answer 1

First of all lets calculate EBIT ( Earning before interest and tax)

We have , basic earning power ratio as 9%

Basic earning power ratio = EBIT/Total asset

total asset = $6 billion

9% = EBIT/ $ 6 billion

EBIT = $ 6 billion x 9%

=$ 0.54 billion

Now, let us calculate interest expense

ROA = Net Income/Total Asset

4% = Net income/$ 6 billion

Net income = $ 6 billion x 4%

= $ 0.24 billion

Given tax rate , we can find Earning before tax

Earning before tax ( 1-tax rate) = Net Income

EBT(1-0.35) = $ 0.24 billion

EBT(0.65) = $ 0.24 billion

EBT = $ 0.24 billion/0.65

EBT = $ 0.3692 billion

Now,

EBIT - Interest = EBT

$ 0.54 billion - Interest = $ 0.3692 billion

Interest = $0.1708 billion

Thus,

TIE Ratio = EBIT/Interest

=0.54 billion / 0.1708 billion

=3.16 times