Question

The W.C. Pruett Corp. has $300,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 10%. In addition, it has $600,000 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 $1.92 million, its average tax rate is 40%, and its profit margin is 5%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places

Answer 1

sales	$ 1920000
Profit Margin = Net Income / Sales
5% = Net Income/1920000
Net Income =$96000
Income Bfore Tax = $96000/(1-0.40)
=	$   160000
Earning before interest and tax = $160000+30000
=	$   190000
Times Interest Earned TIE) Ratio = EBIT/ Interest expenses
= $190000/30000
=6.33 times
NOPAT =EBIT *(1-tax rate)
=$190000*(1-0.40)
$   1,14,000
return on invested capital (ROIC) = NOPAT/ Total capital
=$114000/(300000+600000)
12.67%