Multiple Choice
When the times interest earned (TIE) ratio is less than 1.0, a company is ______.
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following best describes how the Times Interest Earned (TIE) ratio is calculated?
A
EBIT divided by interest expense
B
Net income divided by interest expense
C
Total assets divided by interest expense
D
EBIT minus interest expense
Verified step by step guidance1
Understand the concept of Times Interest Earned (TIE) ratio: It is a financial metric used to measure a company's ability to meet its interest obligations. It indicates how many times a company can cover its interest expense with its earnings before interest and taxes (EBIT).
Identify the formula for TIE ratio: The formula is \( \text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} \). This formula shows the relationship between EBIT and interest expense.
Clarify the components of the formula: EBIT stands for Earnings Before Interest and Taxes, which represents the company's operating income before deducting interest and taxes. Interest expense refers to the cost incurred by the company for borrowed funds.
Compare the given options: Evaluate each option to determine which one matches the formula \( \text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} \).
Select the correct answer: Based on the formula, the correct description of how the TIE ratio is calculated is 'EBIT divided by interest expense'.
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