Question

The Morrit Corporation has $450,000 of debt outstanding, and it pays an interest rate of 10% annually. Morrit's annual sales are $3 million, its average tax rate is 25%, and its net profit margin on sales is 7%. If the company does not maintain a TIE ratio of at least 4 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

Times interest earned ratio = Earning before interest and tax (EBIT) / Total interest expense

Total Interest expense = Debt Outstanding * Interest rate

= 450,000 * 10%

= $45000

Now, We will calculate Earning before interest and tax (EBIT)

We have given Net profit = 7% * Sales

= 7% * 30,00,000

=$210,000

EBIT = (Net Profit + Interest) / ( 1 - Tax Rate)

=( 210,000 + 45,000) / ( 1 - 25%)

= 255000 / 0.75

EBIT = $340000

Now, TIE Ratio

= 340,000 / 45,000

TIE Ratio = 7.56