Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm? Consider everything else equal.
A)If the debt/assets ratio increases, the TIE ratio will also increase.
B)If the debt/assets ratio decreases, the TIE ratio will increase.
C)If the debt/assets ratio decreases, the TIE ratio will also decrease.
D)The debt/assets ratio will always be equal to the TIE ratio.
E)The debt/assets ratio and the TIE ratio are not related to each other.

Question

Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm? Consider everything else equal. 
A)If the debt/assets ratio increases, the TIE ratio will also increase.
B)If the debt/assets ratio decreases, the TIE ratio will increase.
C)If the debt/assets ratio decreases, the TIE ratio will also decrease.
D)The debt/assets ratio will always be equal to the TIE ratio.
E)The debt/assets ratio and the TIE ratio are not related to each other.

Quizplus · Accepted Answer

The times-interest-earned ratio (TIE) measures a company's ability to meet its interest payments on its debt. The higher the TIE ratio, the more easily a company can cover its interest expenses. On the other hand, the debt/assets ratio measures the proportion of a firm's assets that are financed by debt. If a firm has a higher debt/assets ratio, it means it is more leveraged and has a greater amount of debt compared to its assets. If everything else is equal, a decrease in the debt/assets ratio means the company has reduced its reliance on debt financing and increased its equity financing. This would lead to a decrease in interest payments and an increase in its TIE ratio. Therefore, option B is true - if the debt/assets ratio decreases, the TIE ratio will increase.

Which of the Following Statements Is True About the Relationship