Question

REVIEW FOLLOWING INFORMATION FOR A, B, C :

BBC Inc. has (NI/EBT ) = .25
BBC Inc. has (EBT/EBIT ) = 1
BBC Inc. has (EBIT/SALES ) = .80

BBC Inc. has an equity multiplier of 3
BBC Inc. has a total asset turnover ratio of 1.5

(A) If BBC Inc. has sales of $500,000, what is BBC'’s Net Income?

(B) What is the Return on Equity (ROE) for BBC Inc.?

(C) What was BBC's interest expense for the year?

Answer 1

EBIT / Sales = 0.80
EBIT / $500,000 = 0.8
EBIT = $400,000

EBT / EBIT = 1.00
EBT / $400,000 = 1.00
EBT = $400,000

Answer a.

Net Income / EBT = 0.25
Net Income / $400,000 = 0.25
Net Income = $100,000

Answer b.

Profit Margin = Net Income / Sales
Profit Margin = $100,000 / $500,000
Profit Margin = 20%

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier
Return on Equity = 20% * 1.50 * 3.00
Return on Equity = 90%

Answer c.

EBT = EBIT - Interest Expense
$400,000 = $400,000 - Interest Expense
Interest Expense = $0