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	700
Variable costs	280
Fixed costs	245
Total Operating Costs	$525.00
Operating Income (or EBIT)	175
Less interest	50
Earnings before Taxes (EBT)	125
Less taxes (40%)	50
Net Income	75

Part 1. Times Interest Earned (TIE) A. 2.40 B.3.50 C. 5.00 D.1.50

Purple Panda Importers Income Statement For the Year Ended on December 31
	(Millions of dollars)
Net Sales	$1,000.00
Variable costs	250
Fixed costs	450
Total Operating Costs	$700.00
Operating Income (or EBIT)	300
Less interest	60
Earnings before Taxes (EBT)	240
Less taxes (40%)	96
Net Income	144

Part 2. Times Interest Earned (TIE) A.1.50 B.3.50 C. 5.00 D.2.40

Part 3. Describe the relationship between the TIE ratios of the two companies.

A. The companies have equal TIE ratios.

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

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

Part 4. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other?

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

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

C.Both companies are equally positioned to cover their interest payments.