lulISSerle had the following balance sheet at beginning 2017: Restaurant buildin
ID: 2339967 • Letter: L
Question
lulISSerle had the following balance sheet at beginning 2017: Restaurant building Restaurant equipment, including furniture Food ingredients plus paper goods, etc. Cash 250,000 25,000 5,000 2,000 Owners' Equity Bank Loan 200,000 82,000 RR prepared and served 10,000 meals during 2017 for which it received an average of 30/meal. Its labor, intermediate goods, gas and electricity, rent cost 225,000. Ignore any depreciation for now. The interest rate on its loan is 7.5%. The cash on its balance sheet represents the average balance on its checki account, which pays 0 interest. Rutgers Rotisserie's tax rate is 22%. RR decided to pay out 60% of its after-tax profits as dividends. What are RR's before and after-tax profits for the year? Its ROE? Coverage ratio? Follow the cash and calculate the change in cash between the start and end of the year.Explanation / Answer
1
Revenue
=10,000*30
300,000
Total operating expenses
225,000
Net operating profit
75,000
Interest expense
=82,000*7.5%
6,150
Net Profit Before Tax
68,850
Income Tax
=68,850*22%
15,147
Net profit after tax
53,703
ROE = Net profit / Average Stockholders' Equity
=53,703/200,000
26.85%
Interest Coverage ratio = EBIT / Interest expense
=75,000/6.150
12.20
Cash - beginning balance
2,000
Add: Revenue
300,000
Less: Operating expenses
225,000
Less: Interest
6,150
Less: Income tax
15,147
Less: Dividends (53,703*60%)
32,221.80
Cash Ending balance
23,481
Change in Cash
21,481
2. If all the profit after tax is retained:
If 2018 has the same net profit after tax, ROE will be = =53,703/253.703 = 21.96%
ROE has reduced since the company, despite having more resources (last year;s retained profits) has not yielded more profits
3. If Depreciation is considered, it reduces the profit after tax, thereby reducing the ROE as well. However interest coverage is not affected since Net operating profit before interest, depreciation and tax is considered for calculation
4. Purchase of new equipment does not affect Net profit (as we are not considering depreciation), ROE or interest coverage ratio. The only change will be in cash balance, which will go down to 13,481
Revised Balance Sheet as of 12/31/2017:
Note: Owners'equity is calculated as follows =Opening balance + Net profit after tax - Dividends = 200,000+53,703-32,221.80
6. When a sale is made on credit, it does not affect the profit, ROE, coverage ratio and retained earnings, if the entity follows accrual basis if accounting.
The only change will be cash balance, which will be short by (50*30) = $1,500. The new balance sheet is shown below. $1,500 is shown as a receivable.
1
Revenue
=10,000*30
300,000
Total operating expenses
225,000
Net operating profit
75,000
Interest expense
=82,000*7.5%
6,150
Net Profit Before Tax
68,850
Income Tax
=68,850*22%
15,147
Net profit after tax
53,703
ROE = Net profit / Average Stockholders' Equity
=53,703/200,000
26.85%
Interest Coverage ratio = EBIT / Interest expense
=75,000/6.150
12.20
Cash - beginning balance
2,000
Add: Revenue
300,000
Less: Operating expenses
225,000
Less: Interest
6,150
Less: Income tax
15,147
Less: Dividends (53,703*60%)
32,221.80
Cash Ending balance
23,481
Change in Cash
21,481
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