A times-interest-earned (TIE) ratio that is less than 1 suggests that a firm _____.
A)is using a low proportion of debt financing in its capital structure
B)has a low probability of defaulting on its loans
C)might not be able to meet its annual interest obligations on its debt
D)is financed with equity only
E)has an extremely low debt/assets ratio

Question

A times-interest-earned (TIE) ratio that is less than 1 suggests that a firm _____. 
A)is using a low proportion of debt financing in its capital structure
B)has a low probability of defaulting on its loans
C)might not be able to meet its annual interest obligations on its debt
D)is financed with equity only
E)has an extremely low debt/assets ratio

Quizplus · Accepted Answer

A times-interest-earned ratio of less than 1 indicates that the company's earnings are not sufficient to cover its interest expenses, which means it may have difficulty meeting its annual interest payments. A times-interest-earned ratio of more than 1 indicates that a company is generating enough earnings to cover its interest expenses. Therefore, the correct choice is C.

A Times-Interest-Earned (TIE) Ratio That Is Less Than 1 Suggests