Question
The Wellington Corporation has $750,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Wellington's annual sales are $3 million, its
The Wellington Corporation has $750,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Wellington's annual sales are $3 million, its average tax rate is 25 percent, and its net profit margin on sales is 5 percent. If the company does not maintain a TIE ratio of at least 3 times, its bank will refuse to renew the loan, and bankruptcy will result. Which of the following statements is (are) correct?
a) Wellington's net profit margin is $150,000
b) Wellington's earnings before taxes is $112,500
c) Wellington's interest charges are 75,000
d) Wellington's TIE ratio is 2.5
e) Based on its TIE ratio, the bank should renew the loan to Wellington
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