CFA Practice Question

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CFA Practice Question

Given the following data: EBIT = 100; Depreciation = 40; Interest = 20; Dividends = 10, calculate the Times Interest Earned (TIE) ratio.

A. 5.0
B. 7.0
C. 14.0
Correct Answer: A

TIE = 100/20 = 5

User Contributed Comments 5

User Comment
hcliv B is correct if the coverage ratio is EBITDA/Interest
kalps I agree with A, why are you assuming it is EBITDA ?
tony1973 TIE = EBIT/Interest Expense: often referred to as the interest coverage ratio. It measures the protection available to creditors as the extent to which earnings available for interest "cover" interest expense.
A more comprehensive measure, the fixed charge coverage ratio, includes all fixed charges:
Fixed charge coverage = Earnings Before Fixed charges and taxes / Fixed charges
Nightsurfer It's the coverage ratio for recurring operating earnings. That's why D and A aren't added back. Dividends aren't deducted because they don't have to be paid, in a worst case. They have a lower priority to creditor obligations.
khalifa92 lol why not just say calculate interest coverage ratio and not complicate things
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