A) (a) Times interest earned ratio = Expected EBIT (2017) / Interest due in 2017

Question

A) (a) Times interest earned ratio = Expected EBIT (2017) / Interest due in 2017 on existing debt

= 333/75 = 4.44 times

(b) EBIT for interest coverage of 1.0 = $75 million

(c) The interest coverage for next year remains the same

B) Assuming Nile sells 2 million new shares at $50 per share instead of raising new debt.

(a) Times interest earned ratio = Expected EBIT (2017) / Interest due in 2017 on existing debt

= 335/75 = 4.46 times

(b) EBIT for interest coverage of 1.0 = $75 million

(c) The interest coverage for next year remains the same

C) Comparing A & B, my recommendation is to issue Equity as there is no significant difference in the Earnings per share in both the scenarios of A & B.

Explanation / Answer

PROBLEMS-Solve the following. Show your work! I. Financing (20 points) Nile Holdings Selected Financial Information as of December 31, 2017 $300.0 million $333.0 million $46.25 million $ 75.0 million Last Years EBIT (2016) Expected EBIT (2017) Current Portion of Existing LT Debt due 2017 Interest Due in 2017 on Existing Debt Tax Rate Times Interest Earned (2016) Common Stock Price per Share Common Shares Outstanding Dividends per Share 40% 4.0 $50.00 25.0 million $2.50 Please refer to the financial information for Nile Holdings above. Nile must decide how to finance a $100 million investment. A. Assume Nile raises $100 million of new debt at the end of 2017, at an interest rate of 8.25%. a. Calculate the firm's pro forma 2018 times-interest-earned (TIE) ratio b. Calculate 2018's times-burden-covered ratio. c. What percentage can EBIT fall before they can no longer meet there annual burden? d. Calculate 2018's earnings per share.

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