Question

The Morrit Corporation has $960,000 of debt outstanding, and it pays an interest rate of 12% annually. Morrit's annual sales are $6 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 6 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morrit's TIE ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer: 3.08

Step-by-step explanation:

The following can be calculated from the information given in the question:

Interest amount will be:

= $960,000 × 12%

= $960,000 × 0.12

= $115,200

Net profit will be:

= 3% of $6 million

= 0.03 × $6 million

= $180,000

Net profit + tax will be thesame as the profit before tax and this will be:

= $180,000/(1 - 25%)

= $180,000/75%

= $180,000/0.75

= $240,000

The addition the profit before tax and the interest will be:

= 240,000 + $115,200

= $355,200

TIE ratio will be:

= EBIT/Interest

= $355,200/$115,200

= 3.08

Bank will also refuse to renew