Use the following information to answer the next question. Total Asset = $40 mil
ID: 2742579 • Letter: U
Question
Use the following information to answer the next question.
Total Asset = $40 million
Depreciation = $1.0 million.
Basic earning power (BEP) ratio is 20%
Lease payments = 0.6 million
Times-interest-earned (TIE) ratio is 6.55
Principal payments = 4 million
What is the company’s EBIT? The company’s interest expense?
Select one:
a. $7.5 million; $0.75 million
b. $3.33 million; $0.83 million
c. $8.0 million; $0.62 million
d. $8.0 million; $1.22 million
e. $1.35 million; $0.37 million
Total Asset = $40 million
Depreciation = $1.0 million.
Basic earning power (BEP) ratio is 20%
Lease payments = 0.6 million
Times-interest-earned (TIE) ratio is 6.55
Principal payments = 4 million
Explanation / Answer
Basic earning power = EBIT/Total Assets
EBIT=Basic earning power*Total Assets=$40 million*20%=$8 million
Times-interest-earned (TIE) ratio=EBIT/Interest
Interest=EBIT/Times-interest-earned (TIE) ratio=$8 milion/6.55=$1.22 million
d. $8.0 million; $1.22 million