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.
1. 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.
2. 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.