Question

Q No 3: a). Altman Corporation has interest expenses of $120,000 annually. Altman’s annual sales are $4 million, its tax rate is 25%, and its net profit margin on sales is 10 percent. What is Altman’s TIE?

b). Back Alley Boys, Inc. had sales of $250,000, cost of goods sold of $80,000, depreciation expense of $27,000, and additions to retained earnings of $33,360. The firm paid out $30,000 in dividends. Assume a 34% income tax rate, what is the times interest earned ratio?

c). Using the following data, compute the value of cost of goods sold for Peterson Brewing:

Current liabilities=$340,000 quick ratio=1.8 inventory turnover=4.0 current ratio=3.3

Answer 1

a)

NPM = $\frac{Earnings after tax(EAT)} {Sales} = 10\%$

EAT=Sales $\times0.10 = 4000000\times0.10 = \$400000$  

EAT = EBT ( 1 - 0.25) = 0.75 EBT

EBT = $\frac{EAT}{0.75} = \frac{400000}{0.75} =\$ 533333.33$

EBIT = EBT + interest = $533333.33 + 120000 =\$ 653333.33$

TIE = $\frac{EBIT}{ Interest} = \frac{653333.33}{120000} = 5.44$

b)

Earnings before interest and tax (EBIT):

= Sales – COGS – Depreciation

$= \$250,000 – \$80,000 – \$27,000$

$=\$143,000$

Earnings before tax (EBT):

= Additions to retained earnings + dividends

$= \frac{(\$33,360 + \$30,000)}{0.66}$

$=\$96,000$

The sum of the additions in retained earnings and the amount of dividends have been divided by 0.66 to arrive at income before tax (IBT).

The annual Interest expense:

= EBIT – IBT

$= \$143,000 – \$96,000$

$= \$47,000$

Times interest earned ratio (TIE):

$= \frac{\$143,000}{\$96,000}$

$=1.49$

C)

Current assets $= 3.3 \times \$340,000 = \$1,122,000$

Quick ratio = (Current assets - Inventory)$\div$ Current liabilities

$1.8 = \frac{(\$1,122,000 - Inventory)}{\$340,000}$

Inventory $= \$510,000$

Inventory Turnover = $\frac{Cost of goods sold }{Inventory}$

Cost of goods sold = $4.0 × \$510,000$

Cost of goods sold = $\$2,040,000$