Question

Answer the following questions:

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?

Answer 1

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.