QQuestionAccounting
QuestionAccounting
What does a times interest earned ratio of 10 times indicate?
Multiple choice question.
The firm can cover the fixed charges
10 times.
Income before interest and taxes covers the interest obligation of the firm by
10 times.
The firm can pay off the interest obligations every
10 days.
The firms debt is
10 times larger than the assets.
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Answer
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Step 1: Understand the concept of the Times Interest Earned (TIE) ratio
The Times Interest Earned ratio, also known as the Interest Coverage Ratio, is a financial metric that shows a company's ability to pay its interest expenses on debt from its earnings before interest and taxes (EBIT). It is calculated by dividing EBIT by the interest expense.
Step 2: Analyze the given ratio
A Times Interest Earned ratio of 10 indicates that the company's EBIT is 10 times larger than its interest expense.
Final Answer
Comparing options (a) and (b), option (b) is more specific and directly related to the definition of the Times Interest Earned ratio. Therefore, the correct answer is: (b) Income before interest and taxes covers the interest obligation of the firm by 10 times.
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