The times-interest-earned (TIE) ratio shows how well a firm can cover its intere

Question

The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income. Compare the income statements of Mitata Co. and Gadgetron Inc. and calculate the TIE ratio for each firm. Complete the following statement, based on the calculations you have already made. Describe the relationship between the TIE ratios of the two companies. The companies have equal TIE ratios. Mitata Co. has a greater TIE ratio than Gadgetron Inc.. Gadgetron Inc. has a greater TIE ratio than Mitata Co.. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other Gadgetron Inc. Is In a better position to cover its interest payment. Both companies are equally positioned to cover their interest payments. Mitata Co. is in a better position to cover its interest payment.

Explanation / Answer

Times interest earned ratio = Earning before interest and tax / interest expense Mitata Gadgetron EBIT 175 150 Interest expense 50 60 Times intrest earned 3.5 2.5 Mitata Co has a greater TIE ratio than Gadgetron Inc Mitata co is in a better position to cover its interest payment

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