Question

A firm only uses debt and common stock to finance its operation. Its capital structure is 30% debt and 70% Equity. It reports NI of $1.5 million and interest expense of $300,000. A firm's tax rate is 25%. Given ROA of 12%, what is its BEP?

18.40%

15.56%

25.55%

17.78% (this is incorrect)

Which of the following statements is/are INCORRECT?

1. High current ratio may also indicate the firm has too much cash and A/R and these liquid assets generally provide low returns.

2. Suppose two firms have identical operating income, a firm uses more debt which will lead to relatively lower profit margin.

3. Other things being equal, the higher total debt to the total capital ratio, the lower TIE ratio will be.

4. BEP reflects the earning power of a firm’s asset after considering the effects of its debt.

5. Both a and c are incorrect statements. (this is incorrect)

A firm has $500,000 interest- bearing debt with annual interest rate of 10%. In addition, a firm also has $700,000 common stock on its balance sheet. A firm's financing is only dependent on debt in common stock. The annual sale of $3 million and tax rate of 10%. The profit margin is 8%. What is its TIE?

1. 5.5x

2. 7.4x (this is incorrect)

3. 6.8x

4. 9.0x

Answer 1