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.

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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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