Question

Other things held constant, the higher a firm's total debt to total capital ratio [measured as (Short-term debt Long-term debt)/(Debt Preferred stock Common equity)], the higher its TIE ratio will be. a. True b. False

Answer 1

Answer:

False

Explanation:

The reason is gearing ratio gives the percentage of debt of the total capital structure. It means that if the gearing ratio is increasing then the debt is increasing and if the debt is increasing then the interest expense is increasing.

The TIE formula is given in the attachment.

And if the interest expense is has increased due to higher gearing ratio then the TIE will decrease because of the increase in the denominator (Interest Expense).