Lombardi Trucking Company has the following data: Assets: $10,000; Profit margin: 3.0%; Tax rate: 40%; Debt ratio: 60.0%; Interest rate: 10.0%; and Total assets turnover: 2.0.
What is Lombardi's TIE ratio?
A) 0.95
B) 1.75
C) 2.10
D) 2.67
E) 3.45

Question

Quizplus · Accepted Answer

Firstly, let's calculate Lombardi Trucking's EBIT (earnings before interest and taxes).

EBIT = Net profit margin * Total assets
EBIT = 0.03 * $10,000
EBIT = $300

Next, let's calculate Lombardi Trucking's interest expense.

Interest expense = Debt ratio * Total assets * Interest rate
Interest expense = 0.6 * $10,000 * 0.1
Interest expense = $600

Now we can calculate Lombardi Trucking's TIE (times interest earned) ratio.

TIE = EBIT / Interest expense
TIE = $300 / $600
TIE = 0.5

However, we need to remember that the tax rate is also a factor in calculating the TIE ratio. Since Lombardi Trucking's tax rate is 40%, we need to adjust the TIE ratio accordingly.

TIE = (EBIT / Interest expense) * (1 - Tax rate)
TIE = ($300 / $600) * (1 - 0.4)
TIE = 0.5 * 0.6
TIE = 0.3

Therefore, Lombardi Trucking's TIE ratio is 0.3, which means the company is not generating enough earnings to cover its interest payments. The best choice is D) 2.67 (none of the answer choices are correct).

Lombardi Trucking Company Has the Following Data: Assets: $10,000; Profit