Multiple Choice
The Times Interest Earned (TIE) ratio is a measure of a company's long-term:
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
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ABC Company had Net Income during the period of $60,000 after Income Taxes of $40,000. Furthermore, the company had outstanding Notes Payable at the beginning and end of the year, respectively, of $250,000 and $350,000. If interest expense was $15,000 during the period, what is the company's TIE ratio?
A
7.7x
B
5x
C
4x
D
20x
Verified step by step guidance1
Understand the TIE (Times Interest Earned) ratio, which measures a company's ability to meet its debt obligations based on its current income. The formula is: \( \text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}} \).
Calculate the Earnings Before Interest and Taxes (EBIT). Start with the Net Income and add back the Income Taxes and Interest Expense, since EBIT is calculated before these deductions: \( \text{EBIT} = \text{Net Income} + \text{Income Taxes} + \text{Interest Expense} \).
Substitute the given values into the EBIT formula: \( \text{EBIT} = 60,000 + 40,000 + 15,000 \).
Calculate the TIE ratio using the EBIT and the Interest Expense: \( \text{TIE Ratio} = \frac{\text{EBIT}}{15,000} \).
Compare the calculated TIE ratio with the provided options (7.7x, 5x, 4x, 20x) to determine the correct answer.
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