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The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income
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.
Expert Solution
1.
=262/50=5.24
2.
=404/80=5.05
3.
Black Sheep Broadcasting Company has a greater TIE ratio than Hungry Whale Electronics Company.
4.
Black Sheep Broadcasting Company is in a better position to cover its interest payment.
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