To determine the times interest earned (TIE) ratio, you can use the following formula:
\[ \text{Times Interest Earned} = \frac{\text{Income before income tax expense} + \text{Interest Expense}}{\text{Interest Expense}} \]
For 20Y8:
- Income before income tax expense = $4,400,000
- Interest expense = $400,000
\[ \text{Times Interest Earned for 20Y8} = \frac{4,400,000 + 400,000}{400,000} = \frac{4,800,000}{400,000} = 12.0 \]
For 20Y9:
- Income before income tax expense = $5,544,000
- Interest expense = $440,000
\[ \text{Times Interest Earned for 20Y9} = \frac{5,544,000 + 440,000}{440,000} = \frac{5,984,000}{440,000} \approx 13.6 \]
Summary:
- Times Interest Earned for 20Y8: 12.0
- Times Interest Earned for 20Y9: 13.6
b. Change in Times Interest Earned Ratio:
The change in the times interest earned ratio from 12.0 in 20Y8 to 13.6 in 20Y9 is favorable because it indicates that the company's ability to cover its interest expenses with its income has improved. A higher TIE ratio suggests better financial stability and a lower risk of defaulting on interest payments.