A corporation has $800,000 of debt outstanding, and it pays aninterest rate of 5 percent...

A corporation has $800,000 of debt outstanding, and it pays an interest rate of 5 percent annually on its bank loan. The firm's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a times interest earned (TIE) ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is this firm's current TIE ratio?

A. 6 times
B. 13 times
C. 8 times
D. 9 times
E. 4 times

Solutions

Expert Solution

TIE ratio = EBIT / INt

Net Income = Sales * Net Profit Margin

= $ 3,200,000 * 6%

= $ 192000

EBT = Net Income / ( 1 - Tax rate )

= $ 192000 / ( 1 - 0.4)

= $ 192000 / 0.6

= $ 320000

Int = Loan * Int Rate

= $ 800000 * 5 %

= $ 40000

EBIT = EBT + INt

= $ 320000 + $ 40000

= $ 360000

TIE Ratio = EBIT / Int

= $ 360000 / $ 40000

= 9

OPtion D is correct.

jeff jeffy answered 2 years ago

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