Times-interest-earned ratio

Times-interest-earned ratio (alternatively known as TIE ratio) is the ration that is determined by dividing earnings before interest and taxes by the interest charges. This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Times-interest-earned ratio (TIE ratio). Determined by dividing earnings before interest and taxes by the interest charges. This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.

Takeover. An action whereby a person or group succeeds in ousting a firm's management and taking control of the company.

• Target capital structure. The relative amount of debt, preferred stock, and common equity that the firm desires. The weighted average cost of capital should be based on these target weights.
• Target cash balance. The desired cash balance that a firm plans to maintain in order to conduct business.
• Target company. A firm that another company seeks to acquire.
• Target distribution ratio. Percentage of net income distributed to shareholders through cash dividends or stock repurchases.
• Target payout ratio. Percentage of net income paid as a cash dividend.
• Targeted share repurchases. Also known as greenmail, occurs when a company buys back stock from a potential acquirer at a price that is higher than the market price. In return, the potential acquirer agrees not to attempt to take over the company.
• Tax loss carryback and tax loss carryforward. Ordinary corporate operating losses can be carried backward for 2 years or forward for 20 years to offset taxable income in a given year.
• Tax preference theory. Proposes that investors prefer capital gains over dividends, because capital gains taxes can be deferred into the future but taxes on dividends must be paid as the dividends are received.
• Taxable income. Gross income less a set of exemptions and deductions that are spelled out in the instructions to the tax forms that individuals must file.
• Technical analysts. Stock analysts who believe that past trends or patterns in stock prices can be used to predict future stock prices.
• Temporary net operating working capital. The NOWC required above the permanent level when the economy is strong and/or seasonal sales are high.
• Tender offer. The offer of one firm to buy the stock of another by going directly to the stockholders, frequently over the opposition of the target company's management.
• Term structure of interest rates. The relationship between yield to maturity and term to maturity for bonds of a single risk class.
• Terminal value. Value of operations at the end of the explicit forecast period; equal to the present value of all free cash flows beyond the forecast period, discounted back to the end of the forecast period at the weighted average cost of capital.
• Time line. A graphical representation used to show the timing of cash flows.

Related concepts

• Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.

Related lectures

• Introduction to Financial Management.