Question

The Morris Corporation has $900,000 of debt outstanding, and it pays an interest rate of 9%...

The Morris Corporation has $900,000 of debt outstanding, and it pays an interest rate of 9% annually. Morris's annual sales are $4.5 million, its average tax rate is 30%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 6 to 1, 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.

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Answer #1

TIE is Times Interest Earned Ratio.

It can be calculated by dividing the EBIT by Total Interest Obligtion.

Step 1: Calculate EBIT.

Step 2: Calculate TIE.

EBIT = $273,857.14

Interest obligation = $81,000

TIE can be calculated by:

The loan will be refused since the TIE ratio is 3.38 times but the required ratio is 6 times.

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