Multiple Choice
Which of the following best represents the formula for the Times Interest Earned (TIE) ratio?
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
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XYZ Company had Income from Operations of $320,000 and Net Income of $80,000. Interest Expense during the current period was $40,000 and Notes Payable totaled $400,000. What is the company's Times Interest Earned?
A
2x
B
6x
C
8x
D
10x
Verified step by step guidance1
Understand the concept of Times Interest Earned (TIE) ratio, which measures a company's ability to meet its debt obligations based on its current income. The formula is: \( \text{TIE} = \frac{\text{Income from Operations}}{\text{Interest Expense}} \).
Identify the given values from the problem: Income from Operations is $320,000 and Interest Expense is $40,000.
Substitute the given values into the TIE formula: \( \text{TIE} = \frac{320,000}{40,000} \).
Simplify the fraction to find the Times Interest Earned ratio.
Interpret the result to understand how many times the company can cover its interest expense with its income from operations.
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