Question

1. A firm has a net profit margin of 15 percent on sales of $20,000,000. If the firm has total liabilities of $7,500,000 total assets of $22,500,000 and an after tax interest cost on total debt of 5 percent, what is the firms ROE?

A) less than 0.01

B) between 0.01 and 0.03

C) between 0.03 and 0.05

D) greater than 0.05

E) cannot be determined with this information

2) Of the four sources of cash listed below, which can be found in the income statement?

A) funds provided by operations

B) funds provided by borrowing

C) funds provided by the sales of assets

D) funds provided by issuing common or preferred stock

E) all of the above

Answer 1

Part (a)
Sales					20000000
Net profit is 15% on sales =					3000000
Total assets					22500000
Total liabilities					7500000
Equity = Total assets - Total liabilities =					15000000
Return on equity = Net profit / Equity
	0.2
So, Answer is D, Greater than 0.05, i.e. 0.20.
Part (b)
Income statement provides information about funds provided by operations. Other information like, funds provided by borrowing or sale of assets, issuing of preferred stock etc. are not shown in income statement. So these information cannot be provided by income statement.
Income statement provides net profit or loss from business operations.
So, Answer is A