객관식
Which of the following best describes how the Times Interest Earned (TIE) ratio is calculated?
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
객관식
What effect will issuing more bonds typically have on the Times Interest Earned (TIE) ratio over time, assuming operating income remains constant?
A
The TIE ratio will increase because operating income increases.
B
The TIE ratio will decrease because interest expense increases.
C
The TIE ratio will remain unchanged because bonds do not affect interest expense.
D
The TIE ratio will increase because interest expense decreases.
검증된 단계별 안내1
Understand the Times Interest Earned (TIE) ratio formula: TIE = Operating Income / Interest Expense. This ratio measures a company's ability to cover its interest obligations with its operating income.
Analyze the impact of issuing more bonds: When a company issues more bonds, it typically incurs additional interest expense because bonds require periodic interest payments to bondholders.
Consider the assumption that operating income remains constant: Since operating income does not change, the numerator of the TIE ratio remains the same.
Evaluate the effect of increased interest expense: As interest expense increases due to the issuance of more bonds, the denominator of the TIE ratio increases, leading to a decrease in the overall TIE ratio.
Conclude that the TIE ratio will decrease over time if operating income remains constant and interest expense increases due to issuing more bonds.
