CHAPTER 2: PROBLEM 5 Sales $25,300 Costs $9,100 Depreciation Expense $1,700 EBIT
ID: 2697215 • Letter: C
Question
CHAPTER 2: PROBLEM 5 Sales $25,300 Costs $9,100 Depreciation Expense $1,700 EBIT Interest Expense $950 EBT Taxes @ 40% Net Income Tax Rate 40% Operating Cash Flow = CHAPTER 3: PROBLEM 2 Debt/Equity Ratio 0.75 Return on Assets 10.40% Total Equity $900,000 Equity Multiplier = Return on Equity = Net Income = CHAPTER 3: PROBLEM 6 ROE 13% Payout Ratio 25% Retention Ratio (Note: You must calculate the retention ratio first then the sustainable growth rate.) Sustainable Growth Rate = CHAPTER 2: PROBLEM 5 Sales $25,300 Costs $9,100 Depreciation Expense $1,700 EBIT Interest Expense $950 EBT Taxes @ 40% Net Income Tax Rate 40% Operating Cash Flow = CHAPTER 3: PROBLEM 2 Debt/Equity Ratio 0.75 Return on Assets 10.40% Total Equity $900,000 Equity Multiplier = Return on Equity = Net Income = CHAPTER 3: PROBLEM 6 ROE 13% Payout Ratio 25% Retention Ratio (Note: You must calculate the retention ratio first then the sustainable growth rate.) Sustainable Growth Rate =Explanation / Answer
Debt/Equity Ratio = 0.75
Total Equity = 900,000
So Debt = 0.75*900000 =675000
Debt ratio = Total Debt/TA = 675000/(675000+900000) = 0.43
Equity Multiplier = 1/(1-Debt Ratio) = 1/(1-0.43)
= 1.75
Return on Assets ROA = 10.40%
Return on Equity = ROA*Equity Multiplier
= 10.40%*1.75 = 0.1820 or 18.20%
ROA = Net Inc/Total assets
So Net Income= ROA * Total Asset = 10.4%*(675000+900000)
= 163800
ROE = 13%
Payout Ratio = 25% =
Retention Ratio = 1- Payout raio = 1-25% = 75%
(Note: You must calculate the retention ratio first then the sustainable growth rate.)
Sustainable Growth Rate = g = Retention ratio*ROE
= 75%*13% = 0.0975 = 9.75%