Question

In: Finance

The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 11%.

The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 11%. In addition, it has $800,000 of common stock on its balance sheet. It finances with only debt and common equity, so it has no preferred stock. Its annual sales are $1.92 million, its average tax rate is 40%, and its profit margin is 5%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places.

Expert Solution

TIE = EBIT / Interest

Interest = 600,000 * 11% = 66000

EAT = sales*Profit margin = 1,920,000 * 5% = 96000

EBT = EAT / (1 - tax rate)

= 96,000 / (1 - 40%)

= 160,000

EBIT = EBT + interest

= 160,000 + 66000

= 226,000

So TIE = 226,000 / 66,000

= 3.42 (rounded to two decimals)

ROIC = EBIT*(1 - tax) / invested capital

invested capital = Equity + Debt

= 600,000 + 800,000

= 1,400,000

ROIC = 226,000*(1-40%) / 1,400,000

= 135600 / 1400000

= 9.69%

jeff jeffy answered 2 years ago

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