This year, Ferro Inc. generated sales of $10 million. Its fixed operating cost is $1 million and its variable cost ratio is 30 percent of sales. Ferro has $60 million of debt outstanding with a before-tax cost of 12 percent. Which of the following statements about Ferro's times interest earned (TIE) ratio is correct?
A. Ferro's TIE ratio is 1.20, which suggests it has enough earnings to meet the required interest payments.
B. Ferro's TIE ratio is 0.83, which suggests it does not have enough earnings to meet the required interest payments.
C. Ferro's TIE ratio is 0.83, which suggests it has enough earnings to meet the required interest payments.
D. Ferro's TIE ratio is 1.39, which suggests it does not have enough earnings to meet the required interest payments.
E. Ferro's TIE ratio is 1.00, which suggests it has just enough earnings to meet the required interest payments.
Answer: B
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