Bell 10. Times-interest-earned (TIE) ratio The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income. Compare the income statements of Lost Pigeon Aviation and Happy Turtle Transporters Inc. and calculate the TIE ratio for each firm. Lost Pigeon Aviation Income Statement for the Year Ended on December 31 Net Sales (Millions of dollars) 700 280 Variable costs Fixed costs Total Operating costs 245 $525.00 175 Operating Income (or EBIT) Less interest 50 125 Earnings before Taxes (EBT) Less taxes (40%) 50 75 Net Income Times Interest Earned (TIE) (Millions of dollars) 500 Happy Turtle Transporters Inc. Income Statement For the Year Ended on December 31 Net Sales Variable costs Fixed costs Total Operating Costs 125 225 $350.00 Operating Income (or EBIT) 150 Less interest 80 Chapter 12 Assignment 10. Times-interest-earned (TIE) ratio The times interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income. Compare the income statements of Lost Pigeon Aviation and Happy Turtle Transporters Inc. and calculate the TIE ratio for each firm. (Millions of dollars) 700 280 Lost Pigeon Aviation Income Statement For the Year Ended on December 31 Net Sales Variable costs Fixed costs Total Operating Costs Operating Income (or EBIT) Less interest 245 $525.00 175 50 125 Earnings before Taxes (EBT) Less taxes (40%) 50 Net Income 75 Times Interest Earned (TIE) 1.88 0.53 Millions of dollars) Happy Turtle Transporters Inc. Income Statement For the Year Ended on December Net Sales 1.50 500 3.50 125 Variable costs 225 Fixed costs $350.00 Total Operating Costs Operating Income (or EBIT) 150 80 Chapter 12 Assignment Happy Turtle Transporters Inc. Income Statement for the Year Ended on December 31 Net Sales (Millions of dollars) 500 Variable costs 125 Fixed costs Total Operating costs 225 $350.00 Operating Income (or EBIT) Less interest 150 80 70 Earnings before Taxes (EBT) Less taxes (40%) Net Income Times Interest Earned (TIE) 28 42 Complete the following statement, based on the calculations you have already made. 1.50 0.53 Describe the relationship between the TIE ratios of the two companies. 3.50 O Lost Pigeon Aviation has a greater TIE ratio than Happy Turtle Transporters Inc.. 1.88 O Happy Turtle Transporters Inc. has a greater TIE ratio than Lost Pigeon Aviation The companies have equal TIE ratios. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? O Lost Pigeon Aviation is in a better position to cover its interest payment. O Both companies are equally positioned to cover their interest payments. O Happy Turtle Transporters Inc. is in a better position to cover its interest payment. Net Sales Variable costs 500 Fixed costs 125 225 Total Operating Costs $350.00 Operating Income (or EBIT) Less interest 150 80 Earnings before Taxes (EBT) Less taxes (40%) 70 28 Net Income 42 Times Interest Earned (TIE) Complete the following statement, based on the calculations you have already made. Describe the relationship between the TIE ratios of the two companies. Lost Pigeon Aviation has a greater TIE ratio than Happy Turtle Transporters Inc. O Happy Turtle Transporters Inc. has a greater TIE ratio than Lost Pigeon Aviation. The companies have equal TIE ratios. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? O Lost Pigeon Aviation is in a better position to cover its interest payment. O Both companies are equally positioned to cover their interest payments. O Happy Turtle Transporters Inc. is in a better position to cover its interest payment. Grade It Now Save & Continua
