Self test - Bear in mind that companies experiencing growth...

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Self test page 43 1. closely held corporation : a corporation that is owned by a few individuals who are typically associated with the firm’s management. Understand the solution. The TIE ratio is 2.75. This means that for every dollar in interest obligations the company has $2.75 in EBIT. This measure shows in part the risk of being unable to cover financial obligations that a company faces. Generally speaking, keeping in mind that this is not an absolute rule, a larger TIE ratio tends to be better. A very small or negative tie ratio would indicate a company at risk of financial distress.
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Unformatted text preview: Bear in mind that companies experiencing growth will often be financing growth through debt, resulting in larger interest obligations. Also bear in mind that companies often make use of the tax shield associated with the use of debt as a financial instrument, keeping a certain amount of debt in the capital structure for that reason. Generally speaking, the TIE ratio can be used, along with other ratios, to measure the sustainability of a company's capital structure, all things in mind...
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This note was uploaded on 02/28/2011 for the course FINANCE 101 taught by Professor Mrkozi during the Spring '10 term at Pittsburgh.

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