Question

The W.C. Pruett Corp. has $700,000 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 $3.64 million, its average tax rate is 35%, 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

Answer:

Times Interest Earned = EBIT / Interest Expense
Net Income = Sales * Profit Margin
Net Income = $3,640,000 * 5%
Net Income = $182,000

Income before Taxes = Net Income / (1 – Tax Rate)
Income before Taxes = 182,000 / (1 – 0.35)
Income before Taxes = $280,000

EBIT = Income before Taxes + Interest Expense
Interest Expense = $700,000 * 10% = $70,000
EBIT = $280,000 + $70,000
EBIT = $350,000

Times Interest Earned = 350,000 / 70,000
Times Interest Earned = 5.00 times

Return on Invested Capital = EBIT * ( 1 – Tax Rate) / Total Invested Capital
Total Invested Capital = $700,000 + $700,000
Total Invested Capital = $1,400,000

Return on Invested Capital = 350,000 * (1 – 0.35) / 1,400,000
Return on Invested Capital = 227,500 / 1,400,000
Return on Invested Capital = 16.25%