What was Ajax Corp's times-interest-earned (TIE) ratio based on the given data?
The firm's times-interest-earned (TIE) ratio is approximately 13.62. Option B is the correct answer. The TIE ratio is a measure of a company's ability to cover its interest expenses with its operating income. It shows how much a company's earnings can support the impact of interest charges. The formula to calculate the TIE ratio is TIE = Operating Income / Interest Charges. Using the provided data, the TIE ratio is calculated to be around 13.62.
Calculation of Ajax Corp's TIE Ratio
Sales: RM560,000
Cost of Goods Sold: RM230,000
Operating Costs: RM132,500
Interest Charges: RM14,500
To calculate the operating income, we subtract the cost of goods sold and operating costs from sales:
Operating Income = Sales - Cost of Goods Sold - Operating Costs
Operating Income = RM560,000 - RM230,000 - RM132,500
Operating Income = RM197,500
Now, we can plug in the values to calculate the TIE ratio:
TIE = Operating Income / Interest Charges
TIE = RM197,500 / RM14,500
TIE ≈ 13.62
Therefore, based on the given data, Ajax Corp's times-interest-earned (TIE) ratio is approximately 13.62. The company has enough operating income to cover its interest expenses with a cushion factor of 13.62 times.