Ratios: If you have interest expenses of

If you have interest expenses of $10,000, Times Interest Earned Ratio of 10 and and Return on Assets of 20%, what are your total assets?

Times Interest Earned Ratio (TIER) is defined as:

TIER = (Earnings Before Interest and Taxes)/(Interest Expense)
TIER = EBIT/IE

We are given that TIER=10 and our interest expense, so in this equation we can solve for our EBIT:

EBIT = TIER*IE
EBIT = 10*($10,000) = $100,000

We are told that our return on assets is 20%, this means that our EBIT represents 20% of our total assets. In order to find out what our total assets were to begin with, we can simply divide EBIT by the decimal value of our return on assets:

Total Assets = (EBIT)/(Return on Assets)
Return on Assets = (Percentage Return on Assets)/100%

Return on Assets = (20%)/(100%)
Return on Assets = .2
Total Assets = ($100,000)/(.2)

Total Assets = $500,000

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