Question

BURT mila nilwollol orld low 6. Graser Trucking has $12 billion in assets, and its tax rate if 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?

Answer 1

Answer: Times-Interest-Earned ratio = (Earnings before Interest expense and Tax expense)/(Interest Expense)

Basic Earning Power = (Earnings before Interest expense and Tax expense)/(Total Assets)

BEP = EBIT/Total Assets = 15% = 0.15 .......(1)

Putting Total Assets = $12 Billion in the equation 1, we woud get

EBIT/12 = 0.15 => EBIT = 12*0.15 = $1.8 Billion ........(2)

Returns on Assets = Net Income/(Total Assets) = 5% = 0.05 ......(3)

Again, putting Total Assets = $12 Billion in the above equation (3), we woud get

Net Income/12 = 0.05 => Net Income = 0.05*12 = $0.6 Billion .........(4)

Since, Net Income = EBIT - Interest Expense - Tax Expense

Tax Expense = Tax Expense*(Profit Before Tax) = 40%*(Profit Before Tax) = 40%*(EBIT - Interest Expense)

Net Income = (EBIT - Interest Expense) - 40%*(EBIT - Interest Expense)

Net Income = (EBIT - Interest Expense)*(1-0.4)

Putting the value from equation (2) and (4), we get

0.6 = 0.6*(1.8 - Interest expense)

1 = 1.8 - Interest Expense

Interest Expense = $1.8 - $1 = $0.8 Billion

Times-Interest-Earned ratio = (Earnings before Interest expense and Tax expense)/(Interest Expense)

Putting the above calculated values of EBIT and Interest Expense, we can calculate TIE Ratio as:

TIE Ratio = 1.8/0.8 = 2.25