The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income. Compare the income statements of Lost Pigeon Aviation and Happy Turtle Transporters Incorporated and calculate the TIE ratio for each firm. Lost Pigeon Aviation 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)=? ____ Happy Turtle Transporters Incorporated Income Statement For the Year Ended on December 31 (Millions of dollars) Net Sales $850 Variable costs 212.5 Fixed costs 382.5 Total Operating Costs 595 Operating Income (or EBIT) $255 Less interest 100 Earnings before Taxes (EBT) $155 Less taxes (40%) 62 Net Income $93 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. (pick one) a)Lost Pigeon Aviation has a greater TIE ratio than Happy Turtle Transporters Incorporated. b)The companies have equal TIE ratios. c)Happy Turtle Transporters Incorporated has a greater TIE ratio than Lost Pigeon Aviation. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? (pick one) a)Happy Turtle Transporters Incorporated is in a better position to cover its interest payment. b)Lost Pigeon Aviation is in a better position to cover its interest payment. c)Both companies are equally positioned to cover their interest payments.
The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income. Compare the income statements of Lost Pigeon Aviation and Happy Turtle Transporters Incorporated and calculate the TIE ratio for each firm. Lost Pigeon Aviation 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)=? ____ Happy Turtle Transporters Incorporated Income Statement For the Year Ended on December 31 (Millions of dollars) Net Sales $850 Variable costs 212.5 Fixed costs 382.5 Total Operating Costs 595 Operating Income (or EBIT) $255 Less interest 100 Earnings before Taxes (EBT) $155 Less taxes (40%) 62 Net Income $93 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. (pick one) a)Lost Pigeon Aviation has a greater TIE ratio than Happy Turtle Transporters Incorporated. b)The companies have equal TIE ratios. c)Happy Turtle Transporters Incorporated has a greater TIE ratio than Lost Pigeon Aviation. Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? (pick one) a)Happy Turtle Transporters Incorporated is in a better position to cover its interest payment. b)Lost Pigeon Aviation is in a better position to cover its interest payment. c)Both companies are equally positioned to cover their interest payments.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The times-interest-earned (TIE) ratio shows how well a firm can cover its interest payments with operating income.
Compare the income statements of Lost Pigeon Aviation and Happy Turtle Transporters Incorporated and calculate the TIE ratio for each firm.
|
Lost Pigeon Aviation 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)=? | ____ |
|
Happy Turtle Transporters Incorporated Income Statement For the Year Ended on December 31
|
|
|---|---|
|
(Millions of dollars)
|
|
| Net Sales | $850 |
| Variable costs | 212.5 |
| Fixed costs | 382.5 |
| Total Operating Costs | 595 |
| Operating Income (or EBIT) | $255 |
| Less interest | 100 |
| Earnings before Taxes (EBT) | $155 |
| Less taxes (40%) | 62 |
| Net Income | $93 |
| 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. (pick one)
a)Lost Pigeon Aviation has a greater TIE ratio than Happy Turtle Transporters Incorporated.
b)The companies have equal TIE ratios.
c)Happy Turtle Transporters Incorporated has a greater TIE ratio than Lost Pigeon Aviation.
Which company is in better position to cover its interest payments, and therefore exhibits lower risk, than the other? (pick one)
a)Happy Turtle Transporters Incorporated is in a better position to cover its interest payment.
b)Lost Pigeon Aviation 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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