9. Nikko Corp.\'s total common equity at the end of last year was $305,000 and i

ID: 2664464 • Letter: 9

Question

9. Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?

a. 16.87%
b. 17.75%
c. 18.69%
d. 19.67%
e. 20.66%

10. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

a. 12.79%
b. 13.47%
c. 14.18%
d. 14.88%
e. 15.63%

11. Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?

a. 4.72
b. 4.97
c. 5.23
d. 5.51
e. 5.80

12. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

a. The company’s bonds are downgraded.
b. Market interest rates rise sharply.
c. Market interest rates decline sharply.
d. The company's financial situation deteriorates significantly.
e. Inflation increases significantly.

13. D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

a. $829.21
b. $850.47
c. $872.28
d. $894.65
e. $917.01

Explanation / Answer

Nikko Corporations Total Common Equity = $305,000
Net Income after taxes = $60,000

Return on Equity = Net Income / Total Common Equity
Return on Equity = [$60,000 / $305,000]
Return on Equity = 19.67%

The right option is (d) 19.67%

Profit Margin = 5.25%
Total Assets Turnover = 1.5
Equity Multiplier = 1.8

ROE = Profit Margin * Total Assets Turnover * Equity Multiplier
ROE = 5.25% * 1.5 * 1.8
ROE = 0.0525 * 1.5 * 1.8
ROE = 0.14175 (or) 14.18%

The right option is (c) = 14.18%

Last year sales = $435,000
Operating costs = $362,500
Interest charges = $12,500
Firm’s times interest earned (TIE) ratio =?

Times interest earned ratio = [EBIT / Interest expenses]
EBIT = [$435,000 - $362,500]
EBIT = $72,500

TIE = [$72,500 / $12,500]
TIE = 5.80

The right option is (e) = 5.80%

Number of years to maturity Nper)

10 years

Par value (or) Face value of the bond (FV)

$1,000

Annual Coupon rate

5.50%

Current Market Interest rate (YTM)

7.00%

Current Market Price of the bond (PV)

Calculating Current Market Price of the bond (PV):

(Using Ms-Excel "PV" Function):

Interest Rate (Rate)

Number of periods to maturity (Nper)

Annual Coupon Payment (PMT) [$1,000 * 5.5%]

-55

Par Value or Future Value of the bond (FV)

-1000

Current Market Price of the bond (PV)

$894.65

Hence, the correct choice is option (d) $894.65