Question

1. what is the debt ration of a firm with a debt-equity ratio of 0.5?

2. An all-equity firm report a net profit margin of 10% on the sale of 30 million if the tax rate is 40% what is the pretax profit?

Answer 1

Solution:1 If the debt-equity ratio of a firm is 0.5:1, in that case, we can say the firm position is moderate as if the debt-equity ratio is more than 0.5 it means most of the firm's assets are financed through debt that is not a good indicator for company financial position and firm is in high-risk position and investors are not ready to invest in such highly levered firm.

2 Net income:- 30 million*10% = 3 Million

Pre Tax profit:- Net Income/1-effective tax rate

= 3 Million/1-0.4

= 5 Million