Question

A company's times interest earned ratio is 12.1. This means that a.the company has 12 times more debt than equity. b.bondholders are at risk of not receiving their interest payments. c.the company has more than enough earnings to make its interest payments. d.None of these choices are correct.

Answer 1

The correct answer is letter "C": the company has more than enough earnings to make its interest payments.

Step-by-step explanation:

Times Interest Earned or TIE measures the ability of an organization to pay its debt. TIE is calculated by dividing a company's earnings before interest and taxes by the interest that is payable on its debts. A low ratio means the company fails to pay debts, and if it fails to fulfill its responsibilities, it may default in bankruptcy. A high ratio means a business can cover its debt expenses.

Thus, if a company's TIE is 12.1 it means its pre-taxed earnings are 12.1 greater than its annual interest expense implying the firm has the funds necessary to cover its interest payment.