Question

jax Corp's sales last year were $415,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?

Answer 1

The times-interest-earned (TIE) ratio measures a firm's ability to meet its interest payment obligations. It is calculated as the Operating Income divided by the Interest Charges. In this case, the TIE ratio is 4.2.

Step-by-step explanation:

The times-interest-earned (TIE) ratio measures a firm's ability to meet its interest payment obligations. It indicates the company's ability to generate enough income to cover interest expenses.

To calculate the TIE ratio, we divide the Operating Income by the Interest Charges. The formula is:

TIE ratio = Operating Income / Interest Charges

In this case, the sales revenue is not provided, but we can assume it is the same as the sales figure mentioned. So, the Operating Income would be the Sales minus the Operating Costs:

Operating Income = Sales - Operating Costs

Using the given figures:

Operating Income = $415,000 - $362,500 = $52,500

Now, we can calculate the TIE ratio:

TIE ratio = $52,500 / $12,500 = 4.2

Therefore, the firm's times-interest-earned ratio is 4.2.