04-21-2011, 06:55 PM
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Altman Corporation has $1,000,000 of debt outstanding, and it pays an interest rate of 12 percent annually. Altman’s annual sales are $4 million, its federal-plus-state tax rate is 40 percent, and its net profit margin on sales is 10 percent. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Altman’s TIE ratio?
e. TIE = EBIT/Interest, so find EBIT and Interest.
Interest = $1,000,000(0.12) = $120,000.
Net income = $4,000,000(0.10) = $400,000.
Pre-tax income = $400,000/(1 – T) = $400,000/0.6 = $666,667.
EBIT = $666,667 + $120,000 = $786,667.
TIE = $786,667/$120,000 = 6.56×.
Altman Corporation has $1,000,000 of debt outstanding, and it pays an interest rate of 12 percent annually. Altman’s annual sales are $4 million, its federal-plus-state tax rate is 40 percent, and its net profit margin on sales is 10 percent. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Altman’s TIE ratio?
e. TIE = EBIT/Interest, so find EBIT and Interest.
Interest = $1,000,000(0.12) = $120,000.
Net income = $4,000,000(0.10) = $400,000.
Pre-tax income = $400,000/(1 – T) = $400,000/0.6 = $666,667.
EBIT = $666,667 + $120,000 = $786,667.
TIE = $786,667/$120,000 = 6.56×.