Question

Blue Sky Drone Company has a total asset turnover ratio of 6.00x, net annual sales of $25 million, and operating expenses of $11.25 million (including depreciation and amortization). On its current balance sheet and income statement, respectively, it reported total debt of $2.5 million, on which it pays 7% interest on its outstanding debt. To analyze a company's financial leverage situation, you need to measure the firm's debt management ratios. Based on the preceding information, what are the values for Blue Sky Drone's debt management ratios? (Note: Do not round intermediate calculations.) Ratio Value Debt ratio Times-interest-earned ratio Blue Sky Drone Company raises around from creditors for each dollar of equity. Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with times-interest-earned ratios (TIE).

Answer 1

Total asset turnover = 6

Sales/Total Assets = 6

Total Assets = 25 million/6 = 4.167 million

Debt Ratio = Debt/Total Assets

= 2.5 million/4.167 million

= 60%

TIE Ratio = EBIT/Interest

= (25 million – 11.25 million)/2.5 million*7%

= 78.57 times

Raises around $1.5 debt (60/40)for each dollar of Equity

High TIE Ratio