ExpertCPA · Question 02 · Area I: Business Analysis
A company has a Debt-to-Equity ratio of 1.5 and a Times Interest Earned (TIE) ratio of 4.0. The company plans to issue $2 million in new debt at a 10% interest rate to repurchase $2 million of equity. The current Earnings Before Interest and Taxes (EBIT) is $5 million and is expected to remain constant. The current interest expense is $1.25 million. Ignoring taxes, what will be the impact on the company's solvency ratios?
A company has a Debt-to-Equity ratio of 1.5 and a Times Interest Earned (TIE) ratio of 4.0. The company plans to issue $2 million in new debt at a 10% interest rate to repurchase $2 million of equity. The current Earnings Before Interest and Taxes (EBIT) is $5 million and is expected to remain constant. The current interest expense is $1.25 million. Ignoring taxes, what will be the impact on the company's solvency ratios?
Answer options:
The Debt-to-Equity ratio will increase, and the Times Interest Earned ratio will decrease to approximately 3.45.
The Debt-to-Equity ratio will decrease, and the Times Interest Earned ratio will increase.
The Debt-to-Equity ratio will increase, and the Times Interest Earned ratio will decrease to 2.5.
The Debt-to-Equity ratio will remain unchanged, but the Times Interest Earned ratio will decrease.
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