The Manor Corporation has $800,000 of debt outstanding, and it pays an interest

Question

The Manor Corporation has $800,000 of debt outstanding, and it pays an interest rate of 12 percent annually. Manor's annual sales are $2.4 million, its average tax rate is 35 percent, and its net profit margin on sales is 7 percent. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Manor's TIE ratio? Round your answer to two decimal places. (Hint: This is a multiple step problem. Please note that TIE ratio is also called the Interest Coverage ratio)

Explanation / Answer

Times-interest-earned (TIE) ratio =EBIT/Interest charges

Int on Debt = Debt *Int Rate = $800,000*12% = $96000
Net Profit=PAT = 7%*Sales = 7%*2.4M = $168000
SO EBT = PAT/(1-T) = 168000/(1-35%) = $258,462
As Int is 96000, SO EBIT = EBT+Int = $258,462 +96000 = $354,462
SO TIE = EBIT/Int charges = $354,462/$96000 = 3.69 .....Ans

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