Question

The W.C. Pruett Corp. has $450,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 10%. In addition, it has $700,000 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 $2.34 million, its average tax rate is 40%, and its profit margin is 8%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places

Answer 1

Hi

TIE (Times interest earned) Ratio = EBIT/interest Expense

Interest Expense = 10%*450,000 = $45,000

Net Income = Profit Margin* Sales

=2,340,000*8%

= $187,200

Profit before tax = Net Income/(1-tax rate)

= 187200/(1-40%)

=187200/0.6

= $312,000

EBIT = Profit before tax + interest

= 312000 + 45000

=$357,000

So TIE = 357000/45000

=7.93 times

ROIC = NOPAT/invested capital

ROIC = EBIT*(1-tax)/(Debt+Equity)

=35700*(1-40%)/(450000+700000)

=214200/1150000

=18.63%

Thanks