I need help trying to solve for Time Intrest Earned(TIE) Finance problem?

Question

I have this problem:
Walt Disney has total interest charges of $28,250 per year, sales of $1,246,500, a net profit margin of 9.70 percent, and a tax rate of 40.00 percent. What is the Times Interest Earned (T.I.E.) ratio for Walt Disney?

Can someone please show me step by step how to solve this question. I know I need to get the EBIT to solve it but I cannot solve it using the information they provided me please someone show me step by steps thanks!

Answer 1

I'll give it a try. Net profit means profit AFTER tax. It is 9.7% of sales, so it's 9.7% of $1,246,500 or $120,910.50. Now this is AFTER tax and the tax rate is 40%, so the profit BEFORE tax must be 100/60 x $120,910.50 = $201,517.50. This is profit before tax but AFTER interest charges of $28,250, so profit before tax and before interest charges must be $201,517.50 plus $28,250 = $229,767.50.
The formula for TIE is EBIT/Interest charges. We know EBIT (Earnings before interest and income taxes) is $229,767.50 and we know interest charge is $28,250, so TIE must be $229,767.50/$28,250 = 8.133, i.e. earnings were 8.133 times of the interest charge.