24. A firm has a net profit margin of 15 percent on sale of $20,000,000. If the

Question

24. A firm has a net profit margin of 15 percent on sale of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and the after-tax interest cost on total debt of 5 percent, what is the firm's ROE? 8.4% 10.9% 12.0% 13.3% 20% 25. A firm has a total debt-to-assets ratio of 0.60. Its equity multiplies is a. 0.70 b. 3.33 c. 0.77 d. 2.50 e. None of the abuse 26. The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that ks = 11 percent and Do. = $2.00. What will he the price of the company's stock three years from now? a. $27.17 b. $6.23 c. $28.50 d. $10.18 e. $20.63 27. You buy a December put option on ABC at an exercise price of $40. You pay a $2 premium to guy this option. The market price of ABC is $18 when you exercise the option. Your profit or loss is a. $20 b. $22 c. $18 d. $16 e. $26

Explanation / Answer

24. Calculation of ROE:

Net Income = Sales x Net Profit Margin

Net Income = 20,000,000 x 15% = $3,000,000

Equity = Assets - Debt

Equity = 22,500,000 - 7,500,000= $15,000,000

ROE = 3,000,000 / 15,000,000 = 20% (e)

25. Total Debt = 0.60

Total Assets = 1

Equity = 1-0.60 = 0.40

Equity Multiplier = Total Assets / Total Equity

Equity Multiplier = 1 / 0.40 = 2.50 (d)

26. D1 = 2 x 95% = 1.90

D2 = 1.90 x 95% = 1.805

D3 = 1.805 x 95% = 1.71475

D4 = 1.71475 x 95% = $1.63

Price at the end of year 3 = 1.63 / 0.11 - (-0.05) = $10.18 (d)

27. Gain from option = $40 - 2 - 18 = $20 (a)

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