Answer the following 1. Firm A and Firm B have debt to total asset ratios of 30%
ID: 2652439 • Letter: A
Question
Answer the following
1. Firm A and Firm B have debt to total asset ratios of 30% and 27% and returns on total assets of 10% and 8%, respectively. Which firm has a greater return on equity?
2. Holliman Corp. has current liabilities of $405,000, a quick ratio of .75, inventory turnover of 6.2, and a current ratio of 1.1. What is the cost of goods sold for the company?
3. A firm wishes to maintain a growth rate of 14% a year, a debt-to-equity ratio of 1.40, and a dividend payout ratio of 25 percent. The ratio of total assets to sales is constant at .75.
a. What profit margin must the firm acheive? Clue: Use the debt to equit ratio to solve for the equity multiplier.
4. A firm had equity of $225,000 at the beginning of the year. At the end of the year, the company had total assets of $310,000. During the year the company sold no new equity. Net income for the year was $12,000 and dividends were $2,250.
a. What is the substantial growth rate for the company?
b. What is the substantial growth rate if you use the formula ROE x b and beginnng of period equity?
c. What is the substantial growth rate if you use end of period equity in this formula?
d. Is this number too high or too low? Why
Explanation / Answer
Answer-1:
Calculation of Return on Equity :
Formula :
Return on Equity = Return on Total Assets /Equity to Total Assets Ratio
Equity to Total Assets Ratio = 1 – Debt to Total Assets ratio
Hence Return on Equity for Firm A = 10% / (1-30%)
=10% /70% = 0.1429
=14.29%
Return on Equity for Firm B = 8% / (1-27%)
=8% /73% = 0.1096
=10.96%
Hence Firm A has greater return on Equity.