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The Morrit Corporation has $540,000 of debt outstanding, and it pays an interest rate of 9% annually. Morritt's annual sales are $3 million, its average tax rate is 25%, and its net profit margin on sales is 4%. If the company does not maintain a TIE ratio of at least 6 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morritt's TIE ratio

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Tundexi

Answer:

Interest amount = $540,000 * 0.09

Interest amount = $48,600

Net profit = 4% * $3,000,000

Net Profit = $120,000

Profit before tax = Net profit / Tax

Profit before tax = $120,000/ 0.75

Profit before tax = $160,000

Earning before interest and Tax = Profit before tax + interest

= $160,000 + $48,600

= $208,600

TIE ratio = EBIT / Interest

TIE ratio = $208,600 / $48,600

TIE ratio =  4.29

Conclusion: The bank will refuse to renew the loan

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