Max. debt ratio for a given TIE ratio

7. Ferri Enterprises is developing its business plan. It will require $1,500,000 of capital, and it projects $500,000 of sales and $425,000 of operating costs (including depreciation) for the first year. The firm is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 6%, but the bank requires it to have a TIE of at least 2.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio (measured as Total debt/Total capital) the firm can use?

a. 25.00%

b. 28.25%

c. 33.33%

d. 37.50%

e. 41.67%