Mr. Agirich has provided the following information and ratios for the Aggie Farm
ID: 2721611 • Letter: M
Question
Mr. Agirich has provided the following information and ratios for the Aggie Farms 20X0 operations:
Average Total Assets = $840,000
Average Total Liabilities = $395,000
Net Farm Income before taxes = $74,800
Interest Paid and accrued = $26,000
Income Taxes Paid = $9,000
Ra = Net Farm Income before tax + Interest/Average Farm Assets
Assets=Debt + Equity
Based on this information, what is the projected Rate of Return on Equity after taxes, for Aggie Farms in 20X1? (Assume that the tax rate, t is 15% and the Rate of Return on Assets before taxes, Ra , will continue as reflected for 20X0 and that the future cost of debt, i, will be 10%. Use the equation presented in class to calculate the projected r. Use the information above to calculate Ra . Remember that Net Farm Income before taxes is from the Income statement and is after interest.
12-8
Assume you have been asked to help Mr. Agirich determine the optimal leverage for his firm. Mr. Agirich provides you with the following probability distribution for Ra and you determine that his level of risk aversion is 2. Assume that i is 10%, and t=15%. Calculate the optimal leverage, expected Ra , the standard deviation of Ra and the coefficient of variation of Ra
What is the expected rate of return to assets?
12%
6.65%
10.76%
None of the above
What is the optimal leverage?
12%
0.33%
6.65%
None of the above
What is the expected rate of return to equity?
0.33
0.698
10.76%
None of the above
What is the standard deviation of the rate of return to equity?
0.33
7.5%
10.76%
None of the above
What is the coefficient of variation for the rate of return to equity?
0.33
7.5%
0.698
None of the above
Explanation / Answer
a. Return on assets = Net Farm Income before tax + Interest/Average Farm Assets = (74800 + 26000)/ 840000 = 12%
c. Return on equity = ROE = Net Income/ Total equity
Net Income before tax = 74,800
Net Income = 74,800 - 9000 = 65,800
Total equity = 840,000 - 395,000 = 445,000
Return on equity = 65800/445000 = 14.79% (None of the above)
We have answered 2 questions: For the remaining, we need the probabilty distribution:
The questions says" Mr. Agirich provides you with the following probability distribution for Ra " and that is is not given by the student
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