Certified Valuation Analyst (CVA) Practice Exam

Using the textbook's formula, what is the times interest earned?

1. 4.5

2. 5.0

3. 6.2

4. 7.8

The correct answer is: 6.2

The times interest earned (TIE) ratio is a financial metric that measures a company's ability to meet its debt obligations based on its earnings before interest and taxes (EBIT). The formula typically used to calculate TIE is: \[ \text{Times Interest Earned} = \frac{\text{EBIT}}{\text{Interest Expense}} \] This ratio indicates how many times a company can cover its interest expenses with its earnings, providing insight into its financial health and risk of default. A higher ratio suggests that the company is in a better position to pay its interest obligations. In this case, the calculated value of 6.2 shows that the company's earnings can cover its interest expenses 6.2 times. This indicates a comfortable buffer to pay interest obligations, suggesting the company is likely managing its debt effectively and reducing financial risk. Values such as 4.5, 5.0, and 7.8 would reflect different levels of financial security regarding debt payments. A ratio of 4.5 would indicate tighter margins, while 7.8 suggests even greater assurance compared to a ratio of 6.2. However, 6.2 strikes a balance, showing solid capability without being overly conservative or at risk.