What is the formula for calculating the times-interest earned (TIE) ratio?
A)TIE ratio = Interest charges ÷ Total liabilities
B)TIE ratio = Earnings per share ÷ Interest charges
C)TIE ratio = Sales ÷ Interest charges
D)TIE ratio = Earnings before interest and taxes ÷ Interest charges
E)TIE ratio = Interest charges ÷ Net income

Question

Quizplus · Accepted Answer

The formula for calculating the TIE ratio is earnings before interest and taxes divided by interest charges. Option D is the only choice that includes both of these elements. Option A is incorrect because it divides interest charges by total liabilities, which is not relevant to determining the company's ability to pay interest. Option B is incorrect because it divides earnings per share by interest charges, which is not an accurate way to measure the company's ability to pay interest. Option C is incorrect because it divides sales by interest charges, which doesn't give a clear indication of the company's ability to cover interest expenses. Option E is incorrect because it divides interest charges by net income, which doesn't take into account other expenses besides interest.

What Is the Formula for Calculating the Times-Interest Earned (TIE)