The times$-$interest$-$earned $($TIE$)$ ratio shows how well a firm can cover its interest payments with operating income.

Compare the income statements of Blue Moose Producers and Purple Panda Importers and calculate the TIE ratio for each firm.

Blue Moose Producers Income Statement For the Year Ended on December $31$

$($Millions of dollars$)$

Net Sales $$1,400$

Variable costs $560$

Fixed costs $490$

Total Operating Costs $1,050$

Operating Income $($or EBIT$)$ $$350$

Less interest $60$

Earnings before Taxes $($EBT$)$ $$290$

Less taxes $(40\%)116$

Net Income $$174$

Times$-$Interest$-$Earned $($TIE$)$

Purple Panda Importers Income Statement For the Year Ended on December $31$

$($Millions of dollars$)$

Net Sales $$1,200$

Variable costs $300$

Fixed costs $540$

Total Operating Costs $840$

Operating Income $($or EBIT$)$ $$360$

Less interest $100$

Earnings before Taxes $($EBT$)$ $$260$

Less taxes $(40\%)104$

Net Income $$156$

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.

The companies have equal TIE ratios.

Blue Moose Producers has a greater TIE ratio than Purple Panda Importers.

Purple Panda Importers has a greater TIE ratio than Blue Moose Producers.

Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other?

Both companies are equally positioned to cover their interest payments.

Purple Panda Importers is in a better position to cover its interest payment.

Blue Moose Producers is in a better position to cover its interest payment.