Debt Management Ratios Calculate the times interest earned ratio for Tierre's Ts,Inc.using the following information.Sales = $200,000,cost of goods sold = $50,000,depreciation expense = $13,000,addition to retained earnings = $70,000,dividends per share = $0.50,tax rate = 30 percent,and number of shares of common stock outstanding = 1,000.Tierre's Ts has no preferred stock outstanding.
A)0.1814
B)0.4854
C)0.685
D)3.7756

Question

Quizplus · Accepted Answer

The formula for the times interest earned (TIE) ratio is earnings before interest and taxes (EBIT) divided by interest expense. Since there is no information provided about Tierre's Ts, Inc.'s interest expense, we cannot calculate the TIE ratio directly. However, we can calculate EBIT using the following formula:

EBIT = Sales - Cost of Goods Sold - Depreciation Expense

EBIT = $200,000 - $50,000 - $13,000 = $137,000

Next, we need to calculate Tierre's Ts, Inc.'s interest expense. We can calculate this using the following formula:

Interest Expense = Interest Paid / (1 - Tax Rate)

Assuming that Tierre's Ts, Inc. has $0 in long-term debt, it has no interest payments to make. Therefore, its interest expense is $0.

Finally, we can calculate the TIE ratio using the following formula:

TIE = EBIT / Interest Expense

TIE = $137,000 / $0 = undefined (or infinity)

The TIE ratio is undefined because the interest expense is $0. Therefore, the best answer is D, which is the only option that is not a calculated value.

Debt Management Ratios Calculate the Times Interest Earned Ratio for Tierre's