Question

The W.C. Pruett Corp. has $950,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 8%. 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 $3.99 million, its average tax rate is 25%, and its profit margin is 7%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places.

TIE: =

ROIC: = %

Answer 1

Annual Sale = $3,990,000

Profit Margin = 7%

Profit before Interest and Tax = $ 3,990,000 * 7%

= $ 279,300

1) TIE = Profit before Interest and Tax / Interst on Debt

= $ 279,300 / ($ 950,000 * 8%)

= $ 279,300 / $ 76,000

= 3.675

2) ROIC = Net Operating Profit after Tax (NOPAT) / Capital Invested

NOPAT = Profit before Interest and Tax * (1 - Tax Rate)

= $ 279,300 ( 1 - 0.25)

= $ 209,475

Capital Invested = Debt Fund + Common Stock

= $ 800,000 + $ 950,000

= $ 1,750,000

ROIC = $ 209,475 / $ 1,750,000 * 100

= 11.97%

answered by: anonymous