Question

6. HHH Inc. reported $32,000 of sales and $8,700 of operating costs (including depreciation). The company had $16,000 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 12.5%, and the federal-plus-state income tax rate was 40%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?

           

a.         $14,256

b.         $13,100

c.         $12,005

d.         $11,980

7. Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

           

a.         2.364

b.         2.198

c.         1.695

d.         1.263

8. Rappaport Corp.'s sales last year were $350,000, and its net income after taxes was $26,000. What was its profit margin on sales?

           

a.         9.558%

b.         8.065%

c.         7.429%

d.         6.664%

9. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?

           

a.         14.18%

b.         16.28%

c.         17.54%

d.         20.36%

Answer 1

Q-1) Economic Value Added (EVA) = EBIT*(1- Tax rate) - (WACC*Operating Assets)

where, EBIT = SAles- operating costs (including depreciation) = $32,000 - $8700 = $23,300

EVA = $23,300*(1-0.40) - (12.5%*$16,000)

EVA = $13,980 - $2000

EVA = $11,980

Option D

Q-2)

Total assets turnover ratio (TATO) = Sales/Total Assets

TATO = $52,000/$22,000

TATO = 2.364

Option A

Q-3) Profit Margin on Sales = (Net Income/sales)*100

Profit Margin on Sales = ($26,000/$350,000)*100

Profit Margin on Sales = 7.429%

Option C

Q-4)

As per DuPont Analysis:-

ROE = Profit Margin*Total assets turnover*Equity Multiplier

ROE = 5.25%*1.5*1.8

ROE = 14.18%

Option A

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