MPI Incorporated has $3 billion in assets, and its tax rate is 40%

Finance Oct 06, 2020

MPI Incorporated has $3 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 13%, and its return on assets (ROA) is 6%. What is MPI's times-interest-earned (TIE) ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

Computation of the times-interest-earned ratio (TIE ratio):-

BEP ratio = EBIT / Total assets

13% = EBIT / $3

EBIT = 13% * $3

= $0.39 billion

ROA = Net income / Total assets

6% = Net income / $3

Net income = 6% * $3

= $0.18 billion

Net income = (EBIT - Interest expense) * (1 - Tax rate)

$0.18 = (0.39 - Interest expense) * (1 - 40%)

0.39 - Interest expense = $0.18 / 60%

Interest expense = $0.39 - $0.30

= $0.09 billion

TIE = EBIT / Interest expense

= $0.39 / $0.09

= 4.33 times

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