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

Compare the income statements of Black Sheep Broadcasting Company and Hungry Whale Electronics Company and calculate the TIE ratio for each firm.

Black Sheep Broadcasting Company Income Statement For the Year Ended on December 31
	(Millions of dollars)
Net Sales	$1,050
Variable costs	420
Fixed costs	368
Total Operating Costs	788
Operating Income (or EBIT)	$262
Less interest	50
Earnings before Taxes (EBT)	$212
Less taxes (40%)	85
Net Income	$127
Times-Interest-Earned (TIE)

Hungry Whale Electronics Company Income Statement For the Year Ended on December 31
	(Millions of dollars)
Net Sales	$1,350
Variable costs	337.5
Fixed costs	607.5
Total Operating Costs	945
Operating Income (or EBIT)	$405
Less interest	80
Earnings before Taxes (EBT)	$325
Less taxes (40%)	130
Net Income	$195
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.

Hungry Whale Electronics Company has a greater TIE ratio than Black Sheep Broadcasting Company.

Black Sheep Broadcasting Company has a greater TIE ratio than Hungry Whale Electronics Company.

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?

Hungry Whale Electronics Company is in a better position to cover its interest payment.

Both companies are equally positioned to cover their interest payments.

Black Sheep Broadcasting Company is in a better position to cover its interest payment.