Suppose a Firm Wants to Maintain a Specific TIE Ratio

question 68

True/False

Suppose a firm wants to maintain a specific TIE ratio. If the firm knows the level of its debt, the interest rate it will pay on that debt, and the applicable tax rate, the firm can then calculate the earnings level required to maintain its target TIE ratio.

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Definitions:

Required Rate

The minimum return rate expected by investors or lenders on their investment or loan.

Constant Rate

A fixed rate that does not change over time, applicable in various financial, scientific, or technical contexts.

Last Dividend

The most recent dividend payment made by a company to its shareholders.

Effective Annual Rate

The interest rate on an investment or loan that accounts for the effect of compounding over a given period.