1. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, a
ID: 2738644 • Letter: 1
Question
1. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, an interest burden and tax burden of 1, and an equity multiplier of 1.8. What was the firm's ROE?
A. 14.69%
B. 14.99%
C. 14.39%
D. 15.59%
E. 15.29%
2. The current stock price of Alcoa is $68 and the stock does not pay dividends. You think in the near future there will be a dramatic movement in stock price depends on the result of a test for new drug. However the direction of the price movement is not clear, so you decide to establish a straddle strategy using at the money options with 1 month to expiration to take advantage of it. Both put and call at the money options have a premium of $5. 1 Month later, the test is postponed, as a result the stock price drops to $65. What is your profit or loss using your strategy?
700 profit
700 loss
300 loss
300 profit
1000 loss
1000 profit
A.700 profit
B.700 loss
C.300 loss
D.300 profit
E.1000 loss
F.1000 profit
Explanation / Answer
1)
ROE = Profit Margin (Profit/Sales)*Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
= 5.1%*1.6*1.8
= 14.69%
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