Question

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 its TIE ratio

Answer 1

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%