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MPI Incorporated has $3 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 12%, and its return on assets (ROA) is 5%. What is MPI's times-interest-earned (TIE) ratio? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer:

Rounded to two decimal places, MPI's Times-Interest-Earned (TIE) ratio is approximately 5.45.

Explanation:

The Times-Interest-Earned (TIE) ratio can be calculated using the formula:

TIE = Earnings Before Interest and Taxes (EBIT) / Interest Expense

To find the TIE ratio, we need to determine the EBIT and the Interest Expense.

Given:

Total Assets (TA) = $3 billion

Tax Rate = 40%

Basic Earning Power (BEP) ratio = 12%

Return on Assets (ROA) = 5%

We can calculate the EBIT using the ROA and the BEP ratio:

ROA = Net Income / Total Assets

5% = Net Income / $3 billion

Net Income = 0.05 * $3 billion

Net Income = $150 million

BEP ratio = EBIT / Total Assets

12% = EBIT / $3 billion

EBIT = 0.12 * $3 billion

EBIT = $360 million

Now, we need to find the Interest Expense. We can use the formula:

Interest Expense = EBIT / TIE

We want to find the TIE ratio, so we rearrange the formula:

TIE = EBIT / Interest Expense

Given that the Tax Rate is 40%, we can calculate the Interest Expense as follows:

Taxable Income = EBIT - (EBIT * Tax Rate)

Taxable Income = $360 million - ($360 million * 0.40)

Taxable Income = $360 million - $144 million

Taxable Income = $216 million

Interest Expense = Taxable Income - Net Income

Interest Expense = $216 million - $150 million

Interest Expense = $66 million

Now, we can calculate the TIE ratio:

TIE = EBIT / Interest Expense

TIE = $360 million / $66 million

TIE ≈ 5.45

Rounded to two decimal places, MPI's Times-Interest-Earned (TIE) ratio is approximately 5.45.

User Sarun Intaralawan
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