Multiple Choice
What effect will issuing more bonds typically have on the Times Interest Earned (TIE) ratio over time, assuming operating income remains constant?
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
Multiple Choice
Which of the following is the numerator used in calculating the Times Interest Earned (TIE) ratio?
A
Earnings Before Interest and Taxes (EBIT)
B
Total Assets
C
Net Income
D
Interest Expense
Verified step by step guidance1
Understand the Times Interest Earned (TIE) ratio: It measures a company's ability to meet its interest obligations. The formula is TIE = EBIT / Interest Expense.
Identify the numerator in the formula: The numerator is the value that represents the company's earnings before accounting for interest and taxes, which is EBIT (Earnings Before Interest and Taxes).
Clarify why EBIT is used: EBIT reflects the company's operating performance and excludes interest and tax expenses, making it a suitable measure for evaluating the ability to cover interest payments.
Eliminate incorrect options: Total Assets, Net Income, and Interest Expense are not appropriate numerators for the TIE ratio because they do not directly measure operating earnings before interest and taxes.
Conclude that the correct numerator for calculating the Times Interest Earned (TIE) ratio is Earnings Before Interest and Taxes (EBIT).
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