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MPI Incorporated has $3 billion in assets, and its tax rate is 25%
MPI Incorporated has $3 billion in assets, and its tax rate is 25%. Its basic earning power (BEP) ratio is 12%, and its return on assets (ROA) is 3%. 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 Times Interest Earned Ratio:
Basic Earning Power (BEP Ratio) = EBIT/ASSETS
12%=EBIT/$3 billion
EBIT = $3 billion*12% =0.36 Billion
Return on Assets = Net Income/Assets
3% = Net Income/$3 billion
Net Income = $3 billion*3% = 0.09 billion
Earning before Taxes (EBT) =0.09/(1-25%) = $0.12 billion
Interest Expense = EBIT-Earning before Taxes
=0.36 - 0.12
= 0.24 billion
Times Interest Earned Ratio = EBIT/Interest Expense
=0.36/0.24
Times Interest Earned Ratio =1.50
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