Problem 2-1 MCK, Inc. has sales of 100,000; total assets of 64,500; and a debt-e

Question

Problem 2-1

MCK, Inc. has sales of 100,000; total assets of 64,500; and a debt-equity ratio of 1.40. If its return on equity is 15%, what is its net income? (You may, or may not, find the Du Pont Identity helpful.)

Problem 2-2

You have collected the following information about a company:
     Sales = 500,000
     Net Income = 44,650
     Dividends = 23,650
     Total Debt = 230,000
     Total Equity = 155,000

A] What is the sustainable growth rate for the company?
B] If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio?
C] What growth rate could be supported with no additional outside financing at all?

Explanation / Answer

Solution for Problem 2.1

Total Assets = $64,500

Debt Equity ratio = 1.40

Total Value of equity = $64,500 / (1 + 1.4)

                                   = $26,875

Total value of equity = $26,875.

Return on equity = 15%

So net Income is calculated below using following formula:

Net Income = Total value of equity × Return on equity

                    = $26,875 × 15%

                    = $4,031.25

Net Income of company is $4,031.25.

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