7-4: Debt Management Ratios Problem 7-10 Times-Interest-Earned Ratio The Morris

Question

7-4: Debt Management Ratios Problem 7-10 Times-Interest-Earned Ratio The Morris Corporation has $400,000 of debt outstanding, and it pays an interest rate of 8% annually. Morns's annual sales ore S2 million, its average tax rate is 30% and its net profit margin on sales is 4%. If the company does not maintain a TIE ratio of at least 3 to 1 then its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.

Explanation / Answer

Times Interest Earned Ratio=EBIT/Total Interest payable=(Sales*Net Profit Margin/(1-tax rate)+Interest)/Interest=Sales*Net profit Margin/((1-tax rate)*(Debt*Interest rate))+1=2000000*4%/((1-30%)*(400000*8%))+1=4.571429

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