Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 12 percent debt outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket. The company is required by the debt holders to maintain its times interest earned ratio at 3.7 or greater. Do not round intermediate calculations. a. What is the present coverage (times interest earned) ratio? Round your answer to one decimal place. times b. How much additional 12 percent debt can the company issue now and maintain its times interest earned ratio at 3.7? (Assume for this calculation that earnings before interest and taxes remain at their present level.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. 2$ million c. If the interest rate on additional debt is 14 percent, how much unused "debt capacity" does the company have? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million
Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 12 percent debt outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket. The company is required by the debt holders to maintain its times interest earned ratio at 3.7 or greater. Do not round intermediate calculations. a. What is the present coverage (times interest earned) ratio? Round your answer to one decimal place. times b. How much additional 12 percent debt can the company issue now and maintain its times interest earned ratio at 3.7? (Assume for this calculation that earnings before interest and taxes remain at their present level.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. 2$ million c. If the interest rate on additional debt is 14 percent, how much unused "debt capacity" does the company have? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Sun Minerals, Inc., is considering issuing additional long-term debt to finance an expansion. Currently, the company has $50 million in 12 percent debt
outstanding. Its after-tax net income is $12 million, and the company is in the 40 percent tax bracket. The company is required by the debt holders to
maintain its times interest earned ratio at 3.7 or greater. Do not round intermediate calculations.
a. What is the present coverage (times interest earned) ratio? Round your answer to one decimal place.
times
b. How much additional 12 percent debt can the company issue now and maintain its times interest earned ratio at 3.7? (Assume for this calculation that
earnings before interest and taxes remain at their present level.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as
1.2, not 1,200,000. Round your answer to two decimal places.
$
million
c. If the interest rate on additional debt is 14 percent, how much unused "debt capacity" does the company have? Enter your answer in millions. For example,
an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
24
million
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education