Det 1. ISSAY. Write your answer in the space provided or on a separate sheet of

Question

Det 1. ISSAY. Write your answer in the space provided or on a separate sheet of paper Nile Holdings Selected financial information as of Dec. 31 2014 2. wh, Last year's EBIT (2014) Expected EBIT (2015) Current portion of existing long-term debt, duc 2015 $34 $175.0 million $189.8 million FC Interest due in 2015 on existing debt Tax rate Common stock price per share Common shares outstanding Dividends per share $36 million 35o $50.00 20 million $2.00 refer to the financial information for Nile Holdings above. Nile must decide how to finance a $100 ume Nile raises $100 million of new debt at the end of 2014, at an interest rate of 7%. million investment. Ass a. Calculate the firm's pro forma 2015 times-interest-earned (TIE) ratio. b. Calculate the percentage EBIT can fall (below expected EBIT) before interest coverage dips below 1.0.

Explanation / Answer

a. Times earnd ratio or Interest coverage ratio is the ability of the company to pay off the interest charges on outstanding debt.

Times Earned Ratio = Earnings before Interest & Tax (EBIT) / Interest Charges (Net of tax)

EBIT (2015) = $189.8 Million

Interest Charges = $36 Million + ($100 Million x 7%) = $43 Million

Interest Charges Net of Tax = $43 Million (1-0.35) = $27.95 Million

Times Earned Ratio = 189.8 / 27.95 = 6.79 times.

NOTE: In the given case, interest charges are taken net of tax because tax lis saved on the amount of interest paid on debt and therefore, cost to the company will be less. Otherwise, we casn also take interest charges as it is. In that case answer will be:

Times Earned Ratio (Pre tax interest) = 189.8 / 43 = 4.414 times

b. Percentage fall in EBIT

Times earned ratio = Earnings before Interest & Tax (EBIT) / Interest Charges (Net of tax)

Times earned ratio = 1.0

Interest Charges net of tax = $27.95 Million

EBIT = Times Earned Ratio x Interest charges net of tax

         = 1.0 x $27.95 Million = $27.95 Million

If EBIT falls below $27.95Million, Times Earned Ratio will fall below to 1.0 times.

Percentage change in EBIT = (189.8 - 27.95) / 189.8 X 100 = 85.274%

NOTE: The same may be changed if we consider Pre-tax interest charges (i.e Interest of $43 Million).

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