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

Compare the income statements of Sleepy Futon Inc. and Purple Panda Importers and calculate the TIE ratio for each firm.

Sleepy Futon Inc. 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	80
Earnings before Taxes (EBT)	95
Less taxes (40%)	38
Net Income	57
Times Interest Earned (TIE)	1.) __________

CHOICES FOR NO. 1

a. 2.19

b. 1.65

c. 3.75

d. 0.71

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	80
Earnings before Taxes (EBT)	220
Less taxes (40%)	88
Net Income	132
Times Interest Earned (TIE)	2.) __________

CHOICES FOR NO. 2

a. 2.19

b. 3.75

c. 0.71

d. 1.65

Complete the following statement, based on the calculations you have already made.

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

a. Sleepy Futon Inc. has a greater TIE ratio than Purple Panda Importers.

b. Purple Panda Importers has a greater TIE ratio than Sleepy Futon Inc..

c. The companies have equal TIE ratios.

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

c. Sleepy Futon Inc. is in a better position to cover its interest payment.