Which of the following statements concerning a firm's times-interest earned (TIE) ratio is correct?
A)Generally the lower its TIE ratio, the higher the probability that the firm will default on its debt.
B)The TIE ratio is calculated by dividing net income by interest charges.
C)The TIE ratio increases if the debt/assets ratio increases, and vice versa.
D)The TIE ratio is always greater than 1.
E)The TIE ratio shows the effects of both operating leverage and financial leverage.

Question

Quizplus · Accepted Answer

A firm's TIE ratio measures its ability to meet its interest payment obligations. If the TIE ratio is low, it indicates that the firm may not be generating enough income to cover its interest expenses, which increases the risk of defaulting on its debt. Therefore, the lower the TIE ratio, the higher the probability of default.

Which of the Following Statements Concerning a Firm's Times-Interest Earned