Question

Times-Interest-Earned Ratio The Morrit Corporation has $960,000 of debt outstanding, and it pays an interest rate of 9% annually. Morrit's annual sales are $6 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.

----------------------

Answer 1

- Net income = Sales*Net Profit Margin

Net income = $6 million*3%

Net income = $180,000

- Interest Expenses = Oustanding Debt*Interest rate

Interest Expenses = $960,000*9%

Interest Expenses = $86,400

- Earnings before Interest & Taxes(EBIT) = Net Income/(1- Tax Rate) + Interest Expenses

EBIT = $180,000/(1-0.25) + $86,400

EBIT = $326,400

- Times Interest Earned(TIE) ratio = EBIT/Interest Expenses

TIE ratio = $326,400/$86,400

TIE ratio = 3.78 times

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating