Question

The Morris Corporation has $350,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $1.75 million, its average tax rate is 40%, and its net profit margin on sales is 7%. 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 Morris's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Debt Outstanding = $350,000

Annual Interest = Debt Outstanding*Interest Rate

= $350,000*8%

=$28,000

Net Profit = Sales*Net Profit Margin

= $1.75 million*7%

= $122,500

Earnings before Interest & Tax = [Net Profit/(1-Tax Rate)] + Interest Expenses

= [$122,500/(1-0.40)] + $28,000

= $232,166.67

Now, Calculating Times Interest Earned(TIE) ratio:-

TIE ratio = Earnings before Interest & Tax/Interest Expenses

= $232,166.67/$28,000

= 8.29 times

So, Morris's TIE ratio is 8.29 times

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