Question

# Answer the following questions: Question A If the sales of a firm increase while all other...

Question A

If the sales of a firm increase while all other components of ROE remain unchanged including ROE itself, you would expect the firm's:

 A) ROA to increase
 B) Equity multiplier to increase
 C) Profit margin to increase
 D) Total asset turnover to increase
 E) None of the above.

Question B

In words, what does a firm's PE ratio of \$15 mean?

 A) For each \$1 of EBIT generated by the firm per share, shareholders are currently paying \$15 per share.
 B) For each \$1 of earnings per share, shareholders are currently paying \$15 per share.
 C) For each \$1 shareholders are currently paying for a share, a firm is earning \$15 per share.
 D) For each \$1 of a firm's net income, shareholders are currently paying \$15 per share.
 E) None of the above.

Question C

A firm has a Debt to Equity ratio of 2. What is the firm's Debt ratio?

Question D

A firm has a ROA of 10% and a Equity Multiplier of 1.2. What is the firm's ROE?

Question E

If your firm has taxable income of \$80,000 then how much will it pay in taxes? Use the updated 2018 statutory tax rate (provided in class) to calculate instead of the book's method.

Question F

Your firm has taxable income of \$80,000. What is the firm's net income? Use the updated 2018 statutory tax rate (provided in class) to calculate instead of the book's method.

Question G

A firm has the following balance sheet as June 14, 2018. What is its current ratio?

 Cash \$10,000 Inventory \$25,000 Prepaid Expenses \$10,000 Property, Plant, and Equipment \$100,000 Goodwill \$25,000 Total Assets \$170,000 Accounts Payable \$5,000 Accruals \$15,000 Current Portion of Long Term Bonds Payable \$25,000 Long Term Bonds Payable \$50,000 Common Stock, Par \$1,000 Common Stock, Paid in Capital \$50,000 Retained Earnings \$24,000 Total Liabilities and Equity \$170,000

Question H

Using the information below, calculate the 2018 Operating Cash Flow.

 2018 2017 Cash \$    10,000.00 \$      8,000.00 Inventory \$    25,000.00 \$      5,000.00 Prepaid Expenses \$    10,000.00 \$      5,000.00 Property, Plant, and Equipment \$ 100,000.00 \$ 110,000.00 Goodwill \$    25,000.00 \$    25,000.00 Total Assets \$ 170,000.00 \$ 153,000.00 Accounts Payable \$      5,000.00 \$    10,000.00 Accruals \$    15,000.00 \$      8,500.00 Current Portion of Long Term Bonds Payable \$    25,000.00 \$      7,000.00 Long Term Bonds Payable \$    50,000.00 \$    60,000.00 Common Stock, Par \$      1,000.00 \$      1,000.00 Common Stock, Paid in Capital \$    50,000.00 \$    50,000.00 Retained Earnings \$    24,000.00 \$    16,500.00 Total Liabilities and Equity \$ 170,000.00 \$ 153,000.00 Sales \$ 100,000.00 \$    90,000.00 COGS \$    25,000.00 \$    20,000.00 Gross Profit \$    75,000.00 \$    70,000.00 Depreciation \$    20,000.00 \$    18,000.00 EBIT \$    55,000.00 \$    52,000.00 Interest \$      5,000.00 \$    10,000.00 EBT \$    60,000.00 \$    42,000.00 Taxes \$    12,600.00 \$      8,820.00 NI \$    47,400.00 \$    33,180.00

Question I

A firm's ROE has increased from 2017 to 2018. Using the information below, identify the ROE component that is responsible for the increase.

 2018 2017 Cash \$    10,000.00 \$      8,000.00 Inventory \$    25,000.00 \$      5,000.00 Prepaid Expenses \$    10,000.00 \$      5,000.00 Property, Plant, and Equipment \$ 100,000.00 \$ 110,000.00 Goodwill \$    25,000.00 \$    25,000.00 Total Assets \$ 170,000.00 \$ 153,000.00 Accounts Payable \$      5,000.00 \$    10,000.00 Accruals \$    15,000.00 \$      8,500.00 Current Portion of Long Term Bonds Payable \$    25,000.00 \$      7,000.00 Long Term Bonds Payable \$    50,000.00 \$    60,000.00 Common Stock, Par \$      1,000.00 \$      1,000.00 Common Stock, Paid in Capital \$    50,000.00 \$    50,000.00 Retained Earnings \$    24,000.00 \$    16,500.00 Total Liabilities and Equity \$ 170,000.00 \$ 153,000.00 Sales \$ 100,000.00 \$    90,000.00 COGS \$    25,000.00 \$    20,000.00 Gross Profit \$    75,000.00 \$    70,000.00 Depreciation \$    20,000.00 \$    18,000.00 EBIT \$    55,000.00 \$    52,000.00 Interest \$      5,000.00 \$    10,000.00 EBT \$    60,000.00 \$    42,000.00 Taxes \$    12,600.00 \$      8,820.00 NI \$    47,400.00 \$    33,180.00

Question J

A firm has a ROA of 10% and a debt ratio of 75%. The firm has sales of \$50,000 and net income of \$10,000. How much equity does the firm have?

a)

Total assets turnover will increase,

Total assets turnover = sales / total assets. A return in asales wil increase the total assets turnover

b)

For each \$1 of earnings per share, shareholders are currently paying \$15 per share.

c)

Equity ratio = 1 / 1 + 2 = 0.33

Debt ratio = 1 - 0.33 = 0.67'

Formula for debt equity ratio is debt / equity

If debt equity ratio is 2, we can find the equity ratio by 1 / ( 1 + D/E)

Therefore, equity ratio is 1 / 1 + 2

Equity ratio = 0.33

That is, equity finances 33% of the assets of the company.

Therefore, debt ratio will be 1 - 0.33 = 0.67

This means that, debt finances 67% of the assets of the company.

The formula for debt ratio is total liabilites / total assets. the debt ratio of 67% states that 67% of total asssets are financed by debt.

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