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Andrei [34K]
3 years ago
9

The 3G Co. has $2,000,000 of assets, and its tax rate is 40%. Its basic earnings power ratio is 16%,and its ROA is 8%. What is i

ts TIE ratio
Business
1 answer:
Nina [5.8K]3 years ago
5 0

Answer: 6%

Explanation:

The Times Interest Ratio is calculated by the formula;

= \frac{EBIT}{Interest}

Earnings Before Interest and Tax (EBIT)

BEP ratio = \frac{EBIT}{Total Assets}

EBIT = BEP ratio * Total Assets

= 16% * 2,000,000

= $320,000

Interest

(EBIT- Interest)(1- Tax rate) = Net income

EBIT - Interest = \frac{Net income}{(1- Tax rate)}

Interest = EBIT - \frac{Net income}{(1- Tax rate)}

Net Income = ROA * Total Assets

= 8% * 2,000,000

= $160,000

Interest = EBIT - \frac{Net income}{(1- Tax rate)}

= 320,000 -  \frac{160,000}{(1- 0.4)}

= $53,333.33

Times Interest Ratio = \frac{EBIT}{Interest}

= \frac{320,000}{53,333.33}

= 6%

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