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	338
Fixed costs	608
Total Operating Costs	$946
Operating Income (or EBIT)	$404
Less interest	80
Earnings before Taxes (EBT)	$324
Less taxes (40%)	130
Net Income	$194
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.

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

The companies have equal TIE ratios.

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

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

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

Both companies are equally positioned to cover their interest payments.

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