Answer:
The company's TIE is 5
Which is above the requirement of the bank.
Explanation:
TIE = income before interest and taxes / interest expense
The first step, is calculate the interest expense:
debt outstanding x debt rate
interest expense: 800,000 x 10% = 80,000
(if there were more than one type of debt, then we should calculate all the interest expense and add them together)
Then we calculate the EBIT (earnings before interest and taxes)
3,200,000 sales
x 6% profit margin:
192,000 net income.
This is the income after taxes and interest
we need to discount this figures.
(EBIT - interest expense) x ( 1 - tax-rate) = net income
(EBIT - 80,000) x ( 1 - 40%) = 192,000
EBIT - 80,000 = 192,000/0.6
EBIT = 320,0000 + 80,000 = 400,000
Now we are able to calculate the TIE ratio:
400,000/80,000 = 5
