Question

The W.C. Pruett Corp. has $800,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 8%. In addition, it has $600,000 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 $2.88 million, its average tax rate is 30%, and its profit margin is 3%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places.

Answer 1

1. TIE ratio = EBIT / Interest expense

EBIT = [ (Annual sales x profit margin) / (1 - tax rate) ] + Amount of debt x interest rate

= [ ($2,880,000 x 3%) / (1 - 0.30) ] + $800,000 x 8%

= 187428.57143

= $187,428.57

TIE ratio = $187,428.57 / ($800,000 x 8%)

TIE ratio = $187,428.57 / $64,000

TIE ratio = 2.92857

TIE ratio = 2.93

2. ROIC = [ EBIT x (1 - tax rate) ] / (Amount of debt + common stock)

= [$187428.57 x (1 - 0.30) ] / ($800,000 + $600,000)

= 0.093714285

= 9.37%