Question

A times-interest-earned ratio of 3.5 indicates that the firm pays 3.5 times its earnings in interest expense. has interest expense equal to 3.5% of EBIT. has interest expense equal to 3.5% of net income. has EBIT equal to 3.5 times its interest expense.

Answer 1

Answer:

has EBIT equal to 3.5 times its interest expense.

Explanation:

The times-interest-earned represent how much pressure the interest expense represent for the firm.

the interest expense affect taxes so we use the earning before taxes and, of course, before interest as well.

Therefore we compare EBIT against interest expense

$\frac{EBIT}{interest \: \: \: expense}$

A lower than 1 meas the company cannot pay their interest

above 1 menas it can pay them.

Then, is up to each creditor how much TIE is required to allow for lending to the firm