Question

The W.C. Pruett Corp. has $800,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 9%. In addition, it has $800,000 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 $3.68 million, its average tax rate is 40%, and its profit margin is 2%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places.

Answer 1

Ans:

TIE = EBIT / Interest liability

ROIC = Net Income / Total capital invested.

As per the question,

EBIT = Annual Sales * Profit margin

= $ 3,680,000 * 2%

= $ 73,600

Less: interest = $ 72,000 ( 800,000 * 9 %)

EBT = $ 1600

Taxation @ 40 % = $ 640

Net Income = $ 960

Total capital invested = $ 800,000 + $ 800,000

= $ 1,600,000

Thus ,

TIE = EBIT / Interest

= $ 73,600 / $ 72,000

= 1.02 times

ROIC = Net Income / Total capital invested

= $ 960 / $ 1,600,000

= 0.06 %