Question

Since EBIT is not necessarily indicative of cash flow, many financial analysts adjust the formulation by: a. adding unpaid taxes to EBIT in the TIE formula b. adding unpaid taxes and interest to EBIT in the formula c. adding depreciation to EBIT in the TIE formula d. adding unpaid taxes, interest and depreciation to EBIT in the TIE formula

Answer 1

Answer: c. adding depreciation to EBIT in the TIE formula

Step-by-step explanation:

The Times Interest Earned Ratio is used to measure the ease by which a company can pay its interest charges using its earnings before tax.

As depreciation is a non-cash expense, the amount apportioned to depreciation can be used when paying for interest so adding it back to the EBIT ensures that the cash resources of the company are included in the analysis of whether a company can pay back debt.