Question

MPI Incorporated has $4 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 8%, and its return on assets (ROA) is 3%. What is MPI's times-interest-earned (TIE) ratio? Round your answer to two decimal places.

x

Pacific Packaging's ROE last year was only 4%; but its management has developed a new operating plan that calls for a debt-to-capital ratio of 40%, which will result in annual interest charges of $390,000. The firm has no plans to use preferred stock and total assets equal total invested capital. Management projects an EBIT of $1,040,000 on sales of $10,000,000, and it expects to have a total assets turnover ratio of 2.4. Under these conditions, the tax rate will be 30%. If the changes are made, what will be the company's return on equity? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

Answer to Question 1:

Total Assets = $4,000 million

Basic Earning Power = EBIT / Total Assets
0.08 = EBIT / $4,000 million
EBIT = $320 million

Return on Assets = Net Income / Total Assets
0.03 = Net Income / $4,000 million
Net Income = $120 million

Net Income = (EBIT - Interest Expense) * (1 - tax)
$120 million = ($320 million - Interest Expense) * (1 - 0.40)
$120 million = ($320 million - Interest Expense) * 0.60
$200 million = $320 million - Interest Expense
Interest Expense = $120 million

Times Interest Earned = EBIT / Interest Expense
Times Interest Earned = $320 million / $120 million
Times Interest Earned = 2.67