Question

6. GAMA Corp. and FAMA Corp. have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. GAMA Corp. has a higher debt to asset ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. GAMA Corp. has a lower times interest earned (TIE) ratio. b. GAMA Corp.has more net income. c. GAMA Corp.pays more in taxes. d. GAMA Corp. has a lower ROE.

Answer 1

Answer: GAMA Corp. has a lower times interest earned (TIE) ratio

Explanation:

The times interest earned (TIE) ratio simply means how the ability of a company to meet its debt obligations is being measured based on the current income that the company has.

Since GAMA Corp. has a higher debt to asset ratio and, therefore, a higher interest expense, it simply means that GAMA Corp. has a lower times interest earned (TIE) ratio when compared to FAMA Corp.

Therefore, the correct option is A.