A company's fixed interest expense is $8,000, its income before interest expense and income taxes is $32,000. Its net income is $9,600. The company's times interest earned ratio equals:
A) 0.25.
B) 3.33.
C) 0.30.
D) 4.0.
E) 0.83.

Question

Quizplus · Accepted Answer

Times interest earned (TIE) ratio measures a company's ability to meet its interest obligations. The formula for TIE is:

TIE = Income Before Interest and Taxes (IBIT) / Interest Expense

From the given data, we can calculate the TIE as:

TIE = IBIT / Interest Expense = $32,000 / $8,000 = 4.0

Since TIE measures how many times a company can cover its interest expense from its earnings before interest and taxes, a higher TIE ratio indicates a better ability to meet interest payments. A TIE ratio of 4.0 means that the company can cover its interest expense four times from its earnings before interest and taxes. Therefore, the correct answer is D.

A Company's Fixed Interest Expense Is $8,000, Its Income Before