Question

Ajax corp's sales last year were $510,000, its operating costs were $362,500, and its interest charges were $12,500. what was the firm's times-interest-earned (tie) ratio?
a. 8.85
b. 12.15
c. 14.75
d. 13.10
e. 11.80

Answer 1

e. 11.80 The "times interest earned ratio" is calculated as EBIT / Interest Charges. To get EBIT, subtract $362,500 from $510,000 to get $147,500. Divide that by the interest charge of $12,500 and you get a TIE ratio of 11.80.

Answer 2

Times interest earned ratio for Ajax corp's: 11.8

Further explanation

The times interest earned ratio is the amount of income that can be used to cover interest expenses

This figure also shows a company's ability to make interest and debt service payments

$\large{\boxed{\bold{Times\:interest\:earned\:ratio=\frac{EBIT\:or\:Income\:before \:Interest\:+\:Taxes}{Interest\:Expense}}}}$

The higher the ratio, the better the company can pay its interest expense,

If a company for example has a Times interest earned ratio of 5, the company's income is 5 times greater than its annual interest expense

Usually this is a reference from the bank / creditor to accept the loan application from the company, because the high ratio shows the company has a low risk to pay its interest payments

Ajax corp's sales last year were $ 510,000, its operating costs were $ 362,500, so the income before interest and income taxes is:

EBIT = $ 510,000 - $ 362,500 = $ 147500

interest charges = $ 12,500

Times interest earned ratio = $ 147500 / $ 12500

Times interest earned ratio = 11.8 (E)

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Keywords: Times interest earned ratio, payments, taxes, expense, debt service