As CFO of Nile Holdings, a carpet wholesaler, you have the following information

Question

As CFO of Nile Holdings, a carpet wholesaler, you have the following information as of December 2011:

Last year's EBIT, 2011: $175.0 million

Expected EBIT, 20-12: $189.8 million

Current portion of existing long-term debt, due 2012: $34 million

Interest due 2012 on existing debt: $36 million

Tax rate: 35%

Common stock price today, per share: $50

Common shares outstanding: 20 million

Dividends per share: $2

Nile has an attractive investment opportunity, and to finance it, must decide whether to issue $100 million in new debt or new equity. Assume Nile raises $100 million of new debt at the end of 2011, at an interest rate of 7%.   What is the firm's pro forma 2012 times interest earned (TIE) ratio?

Please provide calculation details

Explanation / Answer

Nile Holdings All Amounts in $ million Expected EBIT for 2012 189.8 Interest on Existing Debt 36 Interest on New Debt 7 Total Interest 43 Proforma TIE for 2012 4.414 : 1

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