Which of the following is true of the times-interest earned (TIE) ratio of a firm?
A) The lower the 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 more than 1.
E) The TIE ratio shows the effects of both operating leverage and financial leverage.

Question

Quizplus · Accepted Answer

A lower TIE ratio indicates that a company is not generating enough earnings to cover its interest expenses, which increases the likelihood of defaulting on its debt.

Which of the Following Is True of the Times-Interest Earned