The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually

Finance Oct 16, 2020

The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit's annual sales are $3 million, its average tax rate is 25%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morrit's TIE ratio?

Expert Solution

Computation of Morrit's TIE Ratio:

TIE = EBIT/Interest Expense

Here,

Profit Margin = Net Income/Sales

Net income = ($3,000,000*3%) = $90,000

Interest Expense = $600,000*8% =$48,000

(EBIT-Interest Expense)(1-Tax Rate) = Net income

(EBIT-$48,000)*(1-0.25) = $90,000

(EBIT- $48,000) = $90000/0.75

EBIT=($90,000/0.75)+$48,000

=$120,000 + $48,000

EBIT = $168,000

TIE = $168,000/$48,000 = 3.50 times

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