Find the time interest earned ratio

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Selection of optimal source of finance and calculating times interest earned ratio

Morton Industries is considering opening a new subsidiary in Boston, to b operated as a separate company. The
company's financial analysts expect the company is considering the following two financing plans (use a 40% marginal tax rate in your analysis):

Plan 1 (Equity financing). Under this plan, 2 million common shares will be sold at \$10 each.
Plan 2 (Debt equity financing). Under this plan, \$10 million of 12% long-term debt and 1 million common shares at \$10 each will be sold.

Suppose Morton adopts Plan 2, and the Boston facility initially operates at an annual EBIT level of \$6 million. What is the time interest earned ratio?

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