Answer to Question #11933 in Economics of Enterprise for Tammy
Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times interest earned (TIE) ratio
The CORRECT statement is E: Company HD has a lower times interest earned (TIE) ratio. TIE ratio is a metric used to measure a company's ability to meet its debt obligations. It usually indicates how many times a company can cover its interest charges on a pretax basis. Company HD has a higher debt ratio and, therefore, a higher interest expense. Failing to meet debt obligations could force a company into bankruptcy.