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Homework answers / question archive / Times-Interest-Earned Ratio The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of 10% annually

Times-Interest-Earned Ratio The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of 10% annually

Finance

Times-Interest-Earned Ratio

The Morris Corporation has $600,000 of debt outstanding, and it pays an interest rate of 10% annually. Morris's annual sales are $3 million, its average tax rate is 35%, and its net profit margin on sales is 4%. If the company does not maintain a TIE ratio of at least 4 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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Computation of Morris's TIE Ratio:

TIE Ratio = EBIT / Interest

Here,

Profit Margin = Net Income / Sales

4% = Net Income / $3 million

Net Income = $3 million * 4% = $120,000

 

Net income before tax = Net Income/(1-tax rate)

= $120,000/(1-35%)

Net income before tax =$184,615.38

 

Earning before Interest & Tax = Net income before tax + Interest Expenses

= $184,615.38 + ($600,000*10%)

= $184,615.38 + $60,000

Earning before interest & tax = $244,615.38

 

TIE Ratio = $244,615.38/$60,000 = 4.8 times

 

As TIE ratio is 4.8 times bank will not refuse to renew the loan and bankruptcy will not result.

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