If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firm's times interest earned ratio (round to two decimals)?
A) 8.17
B) 4.90
C) 13.25
D) 9.17

Question

Quizplus · Accepted Answer

The formula for the times interest earned (TIE) ratio is:

TIE = EBIT / Interest Expense

Where EBIT is earnings before interest and taxes.

To find EBIT, we can use the formula:

EBIT = Net Profit Margin x Sales

First, we find EBIT:

EBIT = 0.07 x $700,000 = $49,000

Now, we can calculate the TIE ratio:

TIE = $49,000 / $10,000 = 4.90

Rounding to two decimals, we get TIE = 4.90.

Therefore, the best choice is D.

If a Firm Has Interest Expenses of $10,000 Per Year