A start-up company is seeking your advice concerning its debt ratio and capital structure decisions. It will require $1,000,000 of total assets and anticipates sales during its first year of operation to be $650,000. The sum of its operating costs and cost of goods sold will be $525,000.The company can borrow funds at an interest rate of 8% however, because of its high-risk business plan, the lender will require the firm to maintain a TIE (times-interest-earned) ratio of at least 5.0x. What is the maximum debt ratio the firm can use so as to meet its TIE ratio of 5.0x? Note that by the term debt ratio I imply Debt/Total Assets from the 13th edition of our text, which in the 14th edition is called the Liabilities-to-assets ratio and is defined as Total liabilities/Total assets.
Hint: To determine the annual interest paid, use the following: INT($) = Debt xi
(wherei = interest rate in %). Also, EBIT = Sales - Operating costs - Cost of goods sold.
EBIT = $650,000 - $525,000 = $125,000
TiE ratio needs to be at ...
The solution solves the question and determines the maximum debt ratio of the company. All the steps are clearly explained and defined in the solution.
Comparing and Contrasting Ratios
Please submit a 3 page word document in APA format with references comparing and contrasting the company ratios (See table 1.1) to one another and the industry. Make a determination of which company is in a better financial situation as part of your conclusion. Also discuss how each company compares to the industry averages.
See Financial Accounting Week 8 Written Assignment Attachment
I have completed the requested ratios (see table 1.1 in attachment). In addition, I have attached the appendices from which the numbers for the ratios have been obtained from. I am having trouble understanding what company is doing better than the other and how all of this relates Industry Average. From what I can gather, it appears that Urban Outfitters is doing better than American Eagle and the Industry Average. However, I am at a lost for how to word this possible discovery into three pages. I need a great deal of help to answer the questions asked above. The help is greatly appreciated.View Full Posting Details