Question

A firm begins the year with $25,000 in assets, of which $10,000 is depreciable equipment, and $16,000 in owners’ equity. Its debt carries an interest rate of 5%. Revenue 30,000 Total operating costs 22,500 Deprecation rate 10% Investment in new equipment 2,200 (this does not get depreciated this year) Profits tax rate 25% Dividend payout ratio 40% What is the coverage ratio? What are its before- and after-tax profits for the year and ROE? How much does it pay in dividends? What are retained earnings? How much cash is added to the balance sheet at the end of the year? Can you see the difficulty with the new balance sheet?

Answer 1

1	Coverage ratio = EBIT/ Interest	14.44
2	Profits before tax	$6,050.00
3	Profits after tax	$4,537.50
4	ROE= Net Income/ Equity	28.36%
5	Dividend	$1,815.00
6	Retained Earnings	$2,722.50
7	Cash added= Net Income+depreciation-Capex	$3337.50

WORKINGS

Revenue	30000
Less: Operating cost	22500
EBITDA	7500
Less: Depreciation(10%*10000)	1000
EBIT	$6,500.00
Interest (5%*(25000-16000))	$450.00
Profits before tax	$6,050.00
Less: Tax @ 25%	$1,512.50
Profits after Tax	$4,537.50
Less: Dividend	$1,815.00
Profits transferred to Retained Earnings	$2,722.50