Question

TIE RATIO MPI Incorporated has $9 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 8%, and its return on assets (ROA) is 3%. What is MPI's times-interest-earned (TIE) ratio? Round your answer to two decimal places. x

Answer 1

Given Asset =9,000,000,000

Tax Rate = 40%

BEP =8%

ROA =3%

Now, BEP = EBIT/Total Assets

or, 8% = EBIT/9,000,000,000

or, EBIT = 720,000,000   ----->(1)

Net Income = ROA * asset

Net income = 3% * 9,000,000,000

Net income =270,000,000

EBIT - Interest = EBT    ----->(2)

or, EBT - EBT *(tax rate) = Net Income   ----->(3)

or, EBT(1-tax rate) =Net Income

from 3

EBT(1-tax rate) = 270,000,000

EBT(0.6) = 270,000,000

EBT = 450,000,000   ------>(4)

from 1,2 and 4

EBIT - Interest = EBT

or, 720,000,000 - Interest = 450,000,000

Interest Expense = 270,000,000 ---->(5)

TIE = EBIT/ interest expense

or, TIE = 720,000,000/270,000,000

or TIE = 2.666666