8 Graser Trucking has 12 billion in assets and its tax rate

8, Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%, what is its times-interest-earned (TIE) ratio? (Use DuPon equation).

Solution

BEP= EBIT / Total Assets

0.15= EBIT / $12,000,000,000

Earnings Before Interest & Taxes [EBIT]= $1,800,000,000

Return on Assets [ROA] = Net Income / Total Assets

0.05 = Net Income / $12,000,000,000

Net Income = $600,000,000

Earnings Before Tax [EBT] = Net Income / (1 - Tax Rate)

= $600,000,000 / (1 - 0.40)

= $1,000,000,000

Interest Expenses = EBIT- EBT

= $1,800,000,000 - $1,000,000,000

= $800,000,000

Time Interest Earned [TIE] Ratio = Earnings Before Interest & Taxes / Interest Expenses

= $1,800,000,000 / $800,000,000

= 2.25 Times

Therefore, Time Interest Earned [TIE] Ratio = 2.25 Times