ACC501 Business Finance Assignment 1 Spring 2011 Idea Solution April 2011

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[COLOR="rgb(244, 164, 96)"]full solution in attachment [/COLOR]


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?

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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×.

[Muttee Ullah]

Thanx 4 idea.......

[Xpert]

you are welcome....