Final answer:
The times interest earned (TIE) ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. For Company B, with an EBIT of $30 million and considering the 40% tax rate, the interest expense works out to $20 million, leading to a TIE ratio of 1.5.
Step-by-step explanation:
The student has asked for assistance in calculating the times interest earned (TIE) ratio for Company B, given its total assets, basic earning power, return on assets (ROA), and tax rate. The TIE ratio is a financial metric that indicates how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT).
We know that Company B's basic earning power (EBIT/Total Assets) is 20%, which means EBIT is 20% of $150 million, so EBIT equals $30 million. Since the tax rate is 40%, we can calculate the after-tax earnings by multiplying the EBIT by (1 - tax rate), which gives us $18 million. Next, we use the ROA formula, which is Net Income/Total Assets, and rearrange it to find Net Income because we know ROA is 11% and Total Assets are $150 million. This gives us a Net Income of $16.5 million.
Now, to find the interest expense, we subtract the after-tax income from the EBIT ($30 million - $18 million = $12 million). However, since this is after-tax, we divide by (1 - tax rate) to reverse-engineer the pre-tax value: $12 million / (1 - 0.4) = $20 million. Finally, we calculate the TIE ratio by dividing EBIT by the interest expense: $30 million / $20 million, which equals 1.5.