Question

Thomson Trucking has $12 billion in assets, and its tax rate is 25%. Its basic earning power (BEP) ratio is 18%, and its return on assets (ROA) is 4.25%. What is its times-interest-earned (TIE) ratio

Answer 1

Answer:

1.46

Explanation:

Given that,

Total Assets value = $12 billion

Tax rate = 25%

Basic earning power (BEP) ratio = 18%

Return on assets (ROA) = 4.25%

Net Earnings:

= Return on assets × Total Assets value

= 4.25% × $12 billion

= $0.51 billion

BEP = EBIT ÷ Total Assets

EBIT = 18% × $12

        = $2.16 billion

Earnings before tax = Net income ÷ (1 - tax)

                                 = $0.51 ÷ (1 - 25% )

                                 = $0.68 billion

Interest Expense = EBIT - EBT

                             = $2.16 - $0.68

                             = $1.48 billion

Times-interest-earned (TIE) ratio:

= EBIT ÷ Interest expense

= $2.16 ÷ $1.48

= 1.46