Problem 4-18 TIE Ratio AEI Incorporated has $7 billion in assets, and its tax ra
ID: 2383569 • Letter: P
Question
Problem 4-18
TIE Ratio
AEI Incorporated has $7 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is AEI's times-interest-earned (TIE) ratio? Round your answer to two decimal places
Problem 4-18
TIE Ratio
AEI Incorporated has $7 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is AEI's times-interest-earned (TIE) ratio? Round your answer to two decimal places
Explanation / Answer
Total Assets = $7 billion
Tax Rate = 40%
BEP = 11%
ROA = 6%
Basic earning power = EBIT / Total assets
11% = EBIT / $7 billion
EBIT = 11%*$7 billion
EBIT = $0.77 billion
Return on total assets (ROA) = Net income / Total assets
6% = Net income / $7 billion
Net income = 6%*$7 billion
Net income = $0.42 billion
So,
(EBIT-Interest)*(1-40%) = Net income
($0.77 - Interest)*60% = $0.42
Interest = $0.07 billion
Times-interest-earned (TIE) ratio = EBIT / Interest
Times-interest-earned (TIE) ratio = $0.77 / $0.07
Times-interest-earned (TIE) ratio = 11 times
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