Problem 3-10 Times-Interest-Earned Ratio The Morris Corporation has $950,000 of

Question

Problem 3-10
Times-Interest-Earned Ratio

The Morris Corporation has $950,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $3.8 million, its average tax rate is 35%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.

Explanation / Answer

Times Interest Earned = EBIT/ Interest

Net Profit =  $3,800,000 x 3% = $114,000

Interest Paid = $950,000 x 8% = $76000

EBIT-Interest*(1-Tax) = Net Profit

=>EBIT = 114000/(1-40%)+76000

=$266000

Therefore, times interest earned = 266000/76000

=3.50 is the correct answer

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