Answer the following questions: Question A If the sales of a firm increase while
ID: 2615518 • Letter: A
Question
Answer the following questions:
Question A
If the sales of a firm increase while all other components of ROE remain unchanged including ROE itself, you would expect the firm's:
A)
ROA to increase
B)
Equity multiplier to increase
C)
Profit margin to increase
D)
Total asset turnover to increase
E)
None of the above.
Question B
In words, what does a firm's PE ratio of $15 mean?
A)
For each $1 of EBIT generated by the firm per share, shareholders are currently paying $15 per share.
B)
For each $1 of earnings per share, shareholders are currently paying $15 per share.
C)
For each $1 shareholders are currently paying for a share, a firm is earning $15 per share.
D)
For each $1 of a firm's net income, shareholders are currently paying $15 per share.
E)
None of the above.
Question C
A firm has a Debt to Equity ratio of 2. What is the firm's Debt ratio?
Question D
A firm has a ROA of 10% and a Equity Multiplier of 1.2. What is the firm's ROE?
Question E
If your firm has taxable income of $80,000 then how much will it pay in taxes? Use the updated 2018 statutory tax rate (provided in class) to calculate instead of the book's method.
Question F
Your firm has taxable income of $80,000. What is the firm's net income? Use the updated 2018 statutory tax rate (provided in class) to calculate instead of the book's method.
Question G
A firm has the following balance sheet as June 14, 2018. What is its current ratio?
Cash
$10,000
Inventory
$25,000
Prepaid Expenses
$10,000
Property, Plant, and Equipment
$100,000
Goodwill
$25,000
Total Assets
$170,000
Accounts Payable
$5,000
Accruals
$15,000
Current Portion of Long Term Bonds Payable
$25,000
Long Term Bonds Payable
$50,000
Common Stock, Par
$1,000
Common Stock, Paid in Capital
$50,000
Retained Earnings
$24,000
Total Liabilities and Equity
$170,000
Question H
Using the information below, calculate the 2018 Operating Cash Flow.
2018
2017
Cash
$ 10,000.00
$ 8,000.00
Inventory
$ 25,000.00
$ 5,000.00
Prepaid Expenses
$ 10,000.00
$ 5,000.00
Property, Plant, and Equipment
$ 100,000.00
$ 110,000.00
Goodwill
$ 25,000.00
$ 25,000.00
Total Assets
$ 170,000.00
$ 153,000.00
Accounts Payable
$ 5,000.00
$ 10,000.00
Accruals
$ 15,000.00
$ 8,500.00
Current Portion of Long Term Bonds Payable
$ 25,000.00
$ 7,000.00
Long Term Bonds Payable
$ 50,000.00
$ 60,000.00
Common Stock, Par
$ 1,000.00
$ 1,000.00
Common Stock, Paid in Capital
$ 50,000.00
$ 50,000.00
Retained Earnings
$ 24,000.00
$ 16,500.00
Total Liabilities and Equity
$ 170,000.00
$ 153,000.00
Sales
$ 100,000.00
$ 90,000.00
COGS
$ 25,000.00
$ 20,000.00
Gross Profit
$ 75,000.00
$ 70,000.00
Depreciation
$ 20,000.00
$ 18,000.00
EBIT
$ 55,000.00
$ 52,000.00
Interest
$ 5,000.00
$ 10,000.00
EBT
$ 60,000.00
$ 42,000.00
Taxes
$ 12,600.00
$ 8,820.00
NI
$ 47,400.00
$ 33,180.00
Question I
A firm's ROE has increased from 2017 to 2018. Using the information below, identify the ROE component that is responsible for the increase.
2018
2017
Cash
$ 10,000.00
$ 8,000.00
Inventory
$ 25,000.00
$ 5,000.00
Prepaid Expenses
$ 10,000.00
$ 5,000.00
Property, Plant, and Equipment
$ 100,000.00
$ 110,000.00
Goodwill
$ 25,000.00
$ 25,000.00
Total Assets
$ 170,000.00
$ 153,000.00
Accounts Payable
$ 5,000.00
$ 10,000.00
Accruals
$ 15,000.00
$ 8,500.00
Current Portion of Long Term Bonds Payable
$ 25,000.00
$ 7,000.00
Long Term Bonds Payable
$ 50,000.00
$ 60,000.00
Common Stock, Par
$ 1,000.00
$ 1,000.00
Common Stock, Paid in Capital
$ 50,000.00
$ 50,000.00
Retained Earnings
$ 24,000.00
$ 16,500.00
Total Liabilities and Equity
$ 170,000.00
$ 153,000.00
Sales
$ 100,000.00
$ 90,000.00
COGS
$ 25,000.00
$ 20,000.00
Gross Profit
$ 75,000.00
$ 70,000.00
Depreciation
$ 20,000.00
$ 18,000.00
EBIT
$ 55,000.00
$ 52,000.00
Interest
$ 5,000.00
$ 10,000.00
EBT
$ 60,000.00
$ 42,000.00
Taxes
$ 12,600.00
$ 8,820.00
NI
$ 47,400.00
$ 33,180.00
Question J
A firm has a ROA of 10% and a debt ratio of 75%. The firm has sales of $50,000 and net income of $10,000. How much equity does the firm have?
A)
ROA to increase
B)
Equity multiplier to increase
C)
Profit margin to increase
D)
Total asset turnover to increase
E)
None of the above.
Explanation / Answer
a)
Total assets turnover will increase,
Total assets turnover = sales / total assets. A return in asales wil increase the total assets turnover
b)
For each $1 of earnings per share, shareholders are currently paying $15 per share.
c)
Equity ratio = 1 / 1 + 2 = 0.33
Debt ratio = 1 - 0.33 = 0.67'
Formula for debt equity ratio is debt / equity
If debt equity ratio is 2, we can find the equity ratio by 1 / ( 1 + D/E)
Therefore, equity ratio is 1 / 1 + 2
Equity ratio = 0.33
That is, equity finances 33% of the assets of the company.
Therefore, debt ratio will be 1 - 0.33 = 0.67
This means that, debt finances 67% of the assets of the company.
The formula for debt ratio is total liabilites / total assets. the debt ratio of 67% states that 67% of total asssets are financed by debt.
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