Question

a.Kaye's Kitchenware has a market/book ratio equal to 1. Its stock price is $15 per share and it has 4.5 million shares outstanding. The firm's total capital is $135 million and it finances with only debt and common equity. What is its debt-to-capital ratio? Round your answer to two decimal places.

Henderson's Hardware has an ROA of 13%, a 8% profit margin, and an ROE of 21%.

b.What is its total assets turnover? Do not round intermediate calculations. Round your answer to two decimal places.

c.What is its equity multiplier? Do not round intermediate calculations. Round your answer to two decimal places.

d. A firm has a profit margin of 5.5% and an equity multiplier of 3.0. Its sales are $290 million, and it has total assets of $145 million. What is its ROE? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer a)

Debt To Capital Ratio = Total Debt / Total Capital

Share Capital = 15 * 4.5 mn = 67.5 mn

Debt To Capital Ratio = Total Capital - Equity Capital / Total Capital

= 135 - 67.50 / 135

= 50%

Answer b)

Total Assets Turnover = ROA / Profit Margin

= 13% / 8%

= 1.625 times

Answer c)

ROE = Profit MArgin * Total Assets Turnover * Equity Multiplier

21% = 8% * 1.625 * Equity Multiplier

Equity Multiplier = 21% / (8% * 1.625)

Equity Multiplier = 1.615 times

Answer d)

ROE = Profit Margin * Assets Turnover * Equity multiplier

PM = 5.5%

AT = 290 / 145 = 2

Equity multiplier = 3

ROE = 5.5% * 2 * 3 = 33%