Question

Excel Online Structured Activity: TIE ratio MPI Incorporated has $3 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 4%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet What is MPI's times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Times-interest-earned (TIE) ratio is interest coverage ratio which denotes availability of before interest and tax income to meet up with interest obligation.

To calculate TIE ratio, following formula can be used:

Times Interest Earned Ratio = EBIT           

Interest Expenses

Step:1 We can determine EBIT from available information using Basic earning power ratio.

Basic Earning Power Ratio =            EBIT           

Total Assets

10% =    EBIT           

$3.00 Billion

Hence, EBIT = $3.00 Billion X 10%

EBIT       = $300.00 Million

Step: 2 To calculate Interest Expense, we need to determine Net Income. Details of Return on Assets (RoA) can be used for same.

Return on Assets Ratio = Net Income           

Total Assets

4% = Net Income          

$3.00 Billion

Net Income = $3.00 Billion X 4%

Net Income = $120.00 Million

Now, we shall use available details of Tax rate to determine EBT.

EBT = Net Income X (1-Tax rate)

= $120.00 Million X (1-0.35)

= $ 184.64 Million

Interest Expense = EBIT - EBT

  = $300.00 Million - $184.64 Million

  = $ 115.39 Million

Interest Expense = $115.39 Million

Step: 3 We shall calculate TIE Ratio using details found in step 1 & 2.

Times Interest Earned Ratio = EBIT           

Interest Expenses

= $300.00 Million    

$115.39 Million

= 2.5998

= 2.60 Rounded to two decimal

MPI’s Times interest earned ratio is 2.60 times.