Question

TIE AND ROIC RATIOS

The W.C. Pruett Corp. has $300,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 12%. 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 $0.84 million, its average tax rate is 40%, and its profit margin is 3%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places.

TIE  x

ROIC  %

Answer 1

TIE ratio i.e.Times Interest Earned ratio = Earnings before interest and tax / Interest Expense
Interest Expense = $300000 * 12% = $36,000
Earnings before Interest and tax = {[Sales * Profit margin %] / (1-Tax rate)} + Interest Expense
Earnings before Interest and tax = {[$8,40,000 * 3%] / (1-0.40)} + $36000 = $78,000
TIE ratio i.e.Times Interest Earned ratio = $78,000 / $36,000 = 2.17 times
Answer 2
Return on invested Capital (ROIC) = (Net Income - dividends) / (Debt + Equity)
Net Income = Sales * Profit % = $8,40,000 * 3% = $25,200
Return on invested Capital (ROIC) = ($25200 - 0) / ($800000 + $300000) = 2.29%