The Morrit Corporation has $900,000 of debt outstanding, and it pays an interest rate of 9% 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

TIE ratio = 3.962

Explanation:

given data

debt outstanding = $900000

rate = 9 %

annual sales = $6 million

average tax rate = 25%

net profit margin = 3%

TIE ratio = 6 to 1

solution

first we get here interest amount that is here express as

interest amount = 900000 × 0.09

interest amount  = 81000

and

net profit will be 3 % of 6 million

net profit = 180000

so here net profit + tax will be

net profit + tax = profit before tax

net profit + tax  = 180000 ÷ (1-0.25)

net profit + tax  = 240000

and

profit before tax + interest = earning before interest and tax

profit before tax + interest  = 81000+240000

profit before tax + interest  = 321000

and

TIE ratio will be

TIE ratio  = EBIT ÷ Interest

TIE ratio  = 321000 ÷ 81000

TIE ratio = 3.962

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