MPI Incorporated has $6 billion in assets, and its tax rate is 35%. Its basic earning power (BEP) ratio is 9%, and its return on assets (ROA) is 4%. What is MPI's times interest earned (TIE) ratio? Round your answer to two decimal places.
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First of all lets calculate EBIT ( Earning before interest and tax)
We have , basic earning power ratio as 9%
Basic earning power ratio = EBIT/Total asset
total asset = $6 billion
9% = EBIT/ $ 6 billion
EBIT = $ 6 billion x 9%
=$ 0.54 billion
Now, let us calculate interest expense
ROA = Net Income/Total Asset
4% = Net income/$ 6 billion
Net income = $ 6 billion x 4%
= $ 0.24 billion
Given tax rate , we can find Earning before tax
Earning before tax ( 1-tax rate) = Net Income
EBT(1-0.35) = $ 0.24 billion
EBT(0.65) = $ 0.24 billion
EBT = $ 0.24 billion/0.65
EBT = $ 0.3692 billion
Now,
EBIT - Interest = EBT
$ 0.54 billion - Interest = $ 0.3692 billion
Interest = $0.1708 billion
Thus,
TIE Ratio = EBIT/Interest
=0.54 billion / 0.1708 billion
=3.16 times
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