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The Morrit Corporation has $720,000 of debt outstanding, and it pays an interest rate of 8%...

The Morrit Corporation has $720,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit's annual sales are $3 million, its average tax rate is 25%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 6 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morrit's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Solutions

Expert Solution

TIE = EBIT / interest expense

interest expense = debt outstanding * interest rate =  $720,000 * 8% = $57,600

EBIT = (net income / (1 - tax rate)) + interest expense

EBIT = ($3 million * 3% / (1 - 25%)) + $57,600

EBIT = $177,600

TIE = $177,600 / $57,600

TIE = 3.08 times

jeff jeffy answered 2 years ago
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