Chapter 2 ( Financial Statement analysis) ( BBS Second year - Finance) ( TU solution)

 TU Exam - 2076 ( BBS 3rd year) 

12. Kantipur Cafe has Rs 500,000 of debt outstanding, and it pays an interest rate of 10 percent annually. Its annual sales are Rs 2 million, its average tax is 30 percent and its net profit margin on sales is 5 percent. If the company doesnot maintain a times interest earned ( TIe ) ratio of at least 5 times, its bank will refuse to renew the loan and bankruptcy will result. 

a. What is Kantipur Cafe's TIe Ratio ? Is the bank likely to renew the loan? 

b. By what percentage, net profit margin should increase in order to get loan renewed? 

Given,

                        Total Debt Outstanding = Rs 500,000

                        Interest Amount = 10 % of Rs 500,000

                                                    = Rs 50,000

                        Annual Sales= Rs 2000000

                        Average Tax = Rs 30%

                        Net Profit margin= 5 %

                        TIE ratio= ?

                        Is the bank likely to renew the loan?

Solution :        

            Tie Ratio =        EBIT                     

              Interest expenses

                        = 192,857.14 / 50000

                        = 3.857  times

Net profit before tax = Net profit /( 1-Tax)

                                    = Rs 100,000 / ( 1-0.3)

                                    = Rs 142,857.14

     Interest = EBIT- EBT

 Or, 50,000  = EBIT – 142857.14

 EBIT= Rs 192,857.14

Ans: Kantipur Cafe's TIE Ratio is 3.857 times. The bank is not likely to renew the loan because it's TIE ratio is less than 5 times.

b) Solution:

            TIE Ratio = 5 times

            TIE Ratio = EBIT / Interest expenses

            Or, 5 = EBIT / Rs 50,000

            Or,  EBIT = Rs 250,000

EBIT	250,000
Less: Interest	50,000
EBT	200,000
Less: Tax ( 30% of Rs 200,000)	60,000
Net profit	140,000

Net profit margin = Net profit / Annual sales

                              = Rs 140,000/ 2000000

                             = 7 %

Percentage increase in Net profit margin =  7% - 5% / 5%

                                                            =  40%

Therefore, Net profit margin should increase by 40% in order to get loan renewed.