Final answer:
A Time Interest Earned (TIE) ratio of 3.5 times means that ``The firm's earnings are 3.5 times its interest expenses``
The answer is option ⇒A
Step-by-step explanation:
When the Time Interest Earned (TIE) ratio is 3.5 times, it means that the firm's earnings are 3.5 times greater than its interest expenses. The TIE ratio is a measure of a company's ability to cover its interest payments with its earnings.
Here's why:
The TIE ratio is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expenses. The resulting ratio indicates how many times the company's earnings can cover its interest payments.
In this case, a TIE ratio of 3.5 times means that the firm's earnings are 3.5 times higher than its interest expenses. This indicates that the firm has a healthy margin of earnings to cover its interest payments.
For example, if a company has $1,000 in earnings and $285 in interest expenses, the TIE ratio would be 3.5 times. This means that the company's earnings are 3.5 times greater than its interest expenses, demonstrating its ability to comfortably meet its interest obligations.
In summary, when the TIE ratio is 3.5 times, it indicates that the firm's earnings are 3.5 times its interest expenses, highlighting the company's ability to cover its interest payments.
The answer is option ⇒A