A times interest earned ratio of 7.0 indicates that the firm

Question

BlackTom AI · Accepted Answer

To evaluate what a times interest earned ratio of 7.0 means, we first recall how TIE is defined: TIE = EBIT / Interest expense. A TIE of 7 indicates EBIT is seven times larger than the interest expense the firm must pay.

Option 1: 'pays seven times more in interest expense than it has in earnings.' This is the opposite of what the ratio expresses. If anything, a high TIE means earnings cover interest well, not that interest dwarfs earnings. The statement confuses the direction of the relationship between earnings and interest.

Option 2: 'has low tax liability.' The TIE ratio is about earnings before interest and taxes (EBIT) relative to interest expense, not about taxes. Tax considerations do not define the ratio, so this is irrelevant to interpreting a TIE of 7.

Option 3: 'can cover (pay for) the firms interest expense 7 times with its earnings.' This aligns with the definition: EBIT must be able to cover interest expense seven times. It accurately describes the meaning of a TIE of 7.

Option 4: 'has interest expense equal to 7% of EBIT.' If interest were 7% of EBIT, the ratio would be EBIT / Interest = 1 / 0.07 ≈ 14.29, not 7. This statement misstates the numeric relationship implied by a TIE of 7.

Overall, the only option consistent with the standard interpretation of a times interest earned ratio of 7.0 is the one describing EBIT covering interest expense seven times. The remaining choices either invert the relationship, misattribute what the ratio measures, or confuse the arithmetic implication of the ratio.

A times interest earned ratio of 7.0 indicates that the firm单项选择题

类似问题

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The lower the value of the times interest earned ratio, the higher is the proportion of the firm's earnings before interest and taxes (EBIT) compared to its interest expense.

Debtors are interested in the times interest earned ratio because they want to

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