Question

Part A.) ABC has 12,243,000 of interest-bearing debt outstanding, and it pays an interest rate of 7.6 percent annually on that debt. ABC's annual sales are 49,629,000 and its average tax rate is 40 percent. The company has a net profit margin of 7.1 percent. If the company does not maintain a TIE ratio of at least 4.00 then the bank will refuse to renew its loan and bankruptcy will result. What is ABC's TIE ratio today, given these numbers? Show your answer to two decimal places.

Part B.) ABC owes $10,000 on his credit card, which carries an annual interest rate of 10.2 percent. If he does not charge anything else and sends the credit card company $513 every month, how many months will it take to pay off the card? (Show your answer to two decimal places, e.g., 12.34)

Answer 1

PART A)
TIE = (Net Income + Interest Expense + Taxes)/Interest Expense
Interest Expense = 0.076 x 12,243,000 = 930,468
Net Profit Margin = Net Income/Sales
Net Income = 0.071 x 49,629,000 = 3,523,659
Net Income = PBT - Taxes = PBT x (1 - Tc)
Net Income = 0.6PBT,
Taxes = 0.4(PBT) = 0.4 x Net Income/0.6 =  2,349,106

TIE = (3,523,659 + 2,349,106 + 930,468)/930,468 = 7.31

PART B)
We use a financial calculator,
PV = 10,000, Pmt = 513, Rate = 10.2%/12 , Compute NPER = 21.40 months