Question

"Thomson Trucking has $21 billion in assets, and its tax rate is 30%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places."

Answer 1

2.85

Step-by-step explanation:

Given that,

Assets value = $21 billion

Tax rate = 30%

Basic earning power (BEP) ratio = 11%

Return on assets (ROA) = 5%

Basic earning power (BEP) ratio = EBIT ÷ Total assets

11% = EBIT ÷ $21 billion

EBIT = 11% × $21 billion

= $2.31 billion

ROA = Net Income ÷ Total Assets

5% = Net Income ÷ $21 billion

Net Income = 5% × $21 billion

= $1.05 billion

Earnings before tax:

= Net income ÷ (1 - tax)

= $1.05 billion ÷ (1 - 0.3)

= $1.5 billion

Interest Expense = EBIT - EBT

= $2.31 billion - $1.5 billion

= $0.81 billion

Therefore,

Times-interest-earned (TIE) ratio:

= EBIT ÷ Interest expense

= $2.31 billion ÷ $0.81 billion

= 2.85