Main Street Motors has $600,000 of debt on its balance sheet, on which it pays 15% interest annually. Their sales are $5 million per year, and the net margin on those sales is 4%. The corporate tax rate for Main Street is 35%. Their debt agreement requires them to maintain a times interest earned (TIE) ratio of 4, or else their loans will not be renewed and they will face bankruptcy. Should the managers be concerned?

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The Answer of Main Street Motors has $600,000 of debt on its balance sheet, on which it pays 15% interest annually. Their sales are $5 million per year, and the net margin on those sales is 4%. The corporate tax rate for Main Street is 35%. Their debt agreement requires them to maintain a times interest earned (TIE) ratio of 4, or else their loans will not be renewed and they will face bankruptcy. Should the managers be concerned?

Main Street Motors Has $600,000 of Debt on Its Balance