Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm?
A) If the debt/assets ratio increases, the TIE ratio will also increase.
B) If the debt/assets ratio decreases, the TIE ratio will increase.
C) If the debt/assets ratio decreases, the TIE ratio will also decrease.
D) The debt/assets ratio will always be equal to the TIE ratio.
E) The debt/assets ratio and the TIE ratio are not related to each other.

Question

Quizplus · Accepted Answer

If the debt/assets ratio decreases, it implies the firm has less debt relative to its assets, which generally leads to lower interest expenses and thus a higher times-interest-earned ratio, assuming earnings remain constant.

Which of the Following Statements Is True About the Relationship