Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will pay on that debt, and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

Question

Quizplus · Accepted Answer

The TIE (Times Interest Earned) ratio is calculated as EBIT (Earnings before Interest and Taxes) divided by Interest Expense. If a firm wants to maintain a specific TIE ratio, it can calculate the required EBIT by rearranging the formula. Specifically, EBIT = TIE x Interest Expense. By knowing the level of debt, interest rate, and tax rate, the firm can calculate its Interest Expense and then use the desired TIE ratio to solve for the required EBIT.

Suppose a Firm Wants to Maintain a Specific TIE Ratio