Compare the income statements of Black Sheep Broadcasting Company and Purple Panda Importers 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 1400 Variable costs 560 Fixed costs 490 Total Operating Costs $1,050.00 Operating Income (or EBIT) 350 Less interest 60 Earnings before Taxes (EBT) 290 Less taxes (40%) 116 Net Income 174 Times Interest Earned (TIE) _? Purple Panda Importers Income Statement For the Year Ended on December 31 (Millions of dollars) Net Sales $1,700.00 Variable costs 425 Fixed costs 765 Total Operating Costs $1,190.00 Operating Income (or EBIT) 510 Less interest 100 Earnings before Taxes (EBT) 410 Less taxes (40%) 164 Net Income 246 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. Choose one choice. A- Black Sheep Broadcasting Company has a greater TIE ratio than Purple Panda Importers. B- Purple Panda Importers has a greater TIE ratio than Black Sheep Broadcasting Company. C- The companies have equal TIE ratios. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? Choose one choice. A- Black Sheep Broadcasting Company is in a better position to cover its interest payment. B- Purple Panda Importers is in a better position to cover its interest payment. C- Both companies are equally positioned to cover their interest payments.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Times-interest-earned (TIE) ratio

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 Purple Panda Importers 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	1400
Variable costs	560
Fixed costs	490
Total Operating Costs	$1,050.00
Operating Income (or EBIT)	350
Less interest	60
Earnings before Taxes (EBT)	290
Less taxes (40%)	116
Net Income	174
Times Interest Earned (TIE)	_________?

Purple Panda Importers Income Statement For the Year Ended on December 31
(Millions of dollars)
Net Sales	$1,700.00
Variable costs	425
Fixed costs	765
Total Operating Costs	$1,190.00
Operating Income (or EBIT)	510
Less interest	100
Earnings before Taxes (EBT)	410
Less taxes (40%)	164
Net Income	246
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. Choose one choice.

A- Black Sheep Broadcasting Company has a greater TIE ratio than Purple Panda Importers.

B- Purple Panda Importers has a greater TIE ratio than Black Sheep Broadcasting Company.

C- The companies have equal TIE ratios.

Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? Choose one choice.

A- Black Sheep Broadcasting Company is in a better position to cover its interest payment.

B- Purple Panda Importers is in a better position to cover its interest payment.

C- Both companies are equally positioned to cover their interest payments.

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