2-13 Wiley's Wilderness pays 6 percent interest on its outstanding debt, which equals $200,000. The company's sales are $540,000, its tax rate is 40 percent, and its net profit margin is 4 percent. (a) What is Wiley's TIE? (b) If Wiley's
2-13 Wiley's Wilderness pays 6 percent interest on its outstanding debt, which equals $200,000. The company's sales are $540,000, its tax rate is 40 percent, and its net profit margin is 4 percent. (a) What is Wiley's TIE? (b) If Wiley's
Chapter1: Financial Statements And Business Decisions
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![### Financial Problem: Wiley's Wilderness
#### Problem 2-13:
**Wiley's Wilderness pays 6 percent interest on its outstanding debt, which equals $200,000. The company's sales are $540,000, its tax rate is 40 percent, and its net profit margin is 4 percent.**
(a) **What is Wiley's TIE?**
The Times Interest Earned (TIE) ratio is a measure of a company's ability to honor its debt payments. It is calculated as follows:
\[ \text{TIE} = \frac{\text{EBIT}}{\text{Interest Expense}} \]
Where:
- EBIT (Earnings Before Interest and Tax) can be derived from the sales, profit margin, and tax rate.
First, let's calculate the net profit:
\[ \text{Net Profit} = \text{Sales} \times \text{Net Profit Margin} \]
\[ \text{Net Profit} = 540,000 \times 0.04 = 21,600 \]
Next, let's find the EBIT. Since net profit is after taxes, we need to reverse-engineer it:
\[ \text{EBT (Earnings Before Tax)} = \frac{\text{Net Profit}}{1 - \text{Tax Rate}} \]
\[ \text{EBT} = \frac{21,600}{1 - 0.4} = \frac{21,600}{0.6} = 36,000 \]
EBIT includes the interest expense:
\[ \text{EBIT} = \text{EBT} + \text{Interest Expense} \]
\[ \text{Interest Expense} = 200,000 \times 0.06 = 12,000 \]
\[ \text{EBIT} = 36,000 + 12,000 = 48,000 \]
Finally, TIE is:
\[ \text{TIE} = \frac{48,000}{12,000} = 4 \]
(b) **If Wiley’s wants to maintain a TIE equal to 6.0, what must its sales equal?**
To find the sales required to maintain a TIE of 6.0, we need to find the required EBIT first:
\[ \text{Required EBIT} = \text{Interest Expense} \times \text{Target TIE} \]
\[ \text{Required EBIT}](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc46bd967-cfaf-4c01-b215-18f93da41394%2Fedcb18f7-66ea-4ea7-85bb-39afc7ab15b5%2F63ifwim_reoriented.jpeg&w=3840&q=75)
Transcribed Image Text:### Financial Problem: Wiley's Wilderness
#### Problem 2-13:
**Wiley's Wilderness pays 6 percent interest on its outstanding debt, which equals $200,000. The company's sales are $540,000, its tax rate is 40 percent, and its net profit margin is 4 percent.**
(a) **What is Wiley's TIE?**
The Times Interest Earned (TIE) ratio is a measure of a company's ability to honor its debt payments. It is calculated as follows:
\[ \text{TIE} = \frac{\text{EBIT}}{\text{Interest Expense}} \]
Where:
- EBIT (Earnings Before Interest and Tax) can be derived from the sales, profit margin, and tax rate.
First, let's calculate the net profit:
\[ \text{Net Profit} = \text{Sales} \times \text{Net Profit Margin} \]
\[ \text{Net Profit} = 540,000 \times 0.04 = 21,600 \]
Next, let's find the EBIT. Since net profit is after taxes, we need to reverse-engineer it:
\[ \text{EBT (Earnings Before Tax)} = \frac{\text{Net Profit}}{1 - \text{Tax Rate}} \]
\[ \text{EBT} = \frac{21,600}{1 - 0.4} = \frac{21,600}{0.6} = 36,000 \]
EBIT includes the interest expense:
\[ \text{EBIT} = \text{EBT} + \text{Interest Expense} \]
\[ \text{Interest Expense} = 200,000 \times 0.06 = 12,000 \]
\[ \text{EBIT} = 36,000 + 12,000 = 48,000 \]
Finally, TIE is:
\[ \text{TIE} = \frac{48,000}{12,000} = 4 \]
(b) **If Wiley’s wants to maintain a TIE equal to 6.0, what must its sales equal?**
To find the sales required to maintain a TIE of 6.0, we need to find the required EBIT first:
\[ \text{Required EBIT} = \text{Interest Expense} \times \text{Target TIE} \]
\[ \text{Required EBIT}
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