This Study Resource Was: Assignment #2 Problem # 4-1

Financial Management FINA.
3010 Name: Gbandi Nikabou

Assignment #2: Ch.4, Problems 1, 3, 9, 11, and 15 Date Due: 02/08/2016
Page 1 of 5
Assignment #2
Problem # 4-1
Given:
Baker Brothers
DSO = 40 days
Annual sales of $7,300,000
Required:
 What is its account receivable balance? Assuming that it uses a 365-days/year
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Method/Solution:
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Receivables
o.
DSO=
Avg . sales per year
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Therefore,
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Account receivables=DSO∗Avg . sales per year

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Account receivables=40 days∗ ( $365

7300000
days )
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Account receivables=$ 8,000,000

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Problem # 4-3
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Given:
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Doublewide Dealers has:
ROA = 10%, and 2% profit margin
ROE =15%
Required:
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Financial Management FINA.3010 Name: Gbandi Nikabou
Page 2 of 5
 What is its total assets turnover?
 What is its equity multiplier?hjhg
Method/Solution:
 Total assets turnover
Sales
Total Assets Turnover=
Total Assets
Net Icome
ROA=
Total Assets
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Net Icome
Profit Margin=
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Sales
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o.
Net Icome
rs e
∗Sales
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ROA Total Assets Sales
= = =Total AssetsTurnover
Profit Margin Net Icome Total Assets
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Sales ROA 0.10

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Total Assets Turnover= = = =5.0 x

Total Asset s Profit Margin 0.02
vi y re
Total Assets Turnover=5.0 x

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 What is its equity multiplier
ROE=Profit Margin∗Total AssetsTurnover∗Equity multiplier

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ROE 0.15
Equity multiplier= = =1.5
Profit Margin∗Total Assets Turnover 0.02∗5
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E quity multiplier =1.5
Problem # 4-9
Page 3 of 5
Given:
Duval manufacturing reported the following information:
Net Interest A/P and Common

ROA Tax Rate debs
Income Expense Accruals Equity
$600,000 8% $225,000 $1,000,000 35% 40% of invt. 60% of invt.
Required:
 Calculate its basic earning power (BEP)

 Calculate its return on equity (ROE)
 Calculate its return on invested capital (ROIC)
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Method/Solution:
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 Calculate its basic earning power (BEP)
o.
Net income = $600,000rs e
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EBT = Net income / (1-0.35) = $600000/0.65 = $923077
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aC s
EBIT = EBT + interest expense = $923076.923 + $225,000 = $1148077

vi y re
Net income Net Icome $ 600000

ROA= , thereforeTotal Asset= =
Total asset ROA 0.08
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Total Asset=$ 7,500,000

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EBIT $ 1, 148 , 077

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BEP= = =0.15307 BEP=15.31

Total Assets $ 7,500,000
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 Calculate its return on equity (ROE)
Total capital = total Assets – Liabilities = $7,500,000 - $1,000,000 = $6,500,000
Common Equity = 60% * Total capital = 0.6*$6,500,000 = $3,900,000
Page 4 of 5
Net Income $ 600,000
ROE= = =0.1538 ROE=15.38
Common Equity $ 3,900,000
 Calculate its return on invested capital (ROIC)
EBIT (1−T ) $ 1148076.923 (1−0.35)

ROIC= = =0.1148
Total invested Capital $ 6,500,000
ROIC=11.48
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Problem # 4-11
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o.
Given:
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Assume the following relationships for the Brauer corp:
Sales/Total assets 1.5x

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Return on assets (ROA) 3.0%

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Return on equity (ROE) 5.0%

vi y re
Required:
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Calculate Brauer’s profit margin and debt-to-capital ratio assuming the firm uses only
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debt and common equity, so total assets equal total invested capital.
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Method/Solution:
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Net Icome
Profit Margin=
 Sales
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Net Icome
ROA= Therefore Net Icome=ROA∗Total Assets
Total Assets
Sales=1.5∗Total Assets
Page 5 of 5
Net Icome ROA∗Total Assets ROA 3
Profit Margin= = = Profit Margin=2
Sales 1.5∗Total Assets 1.5 1.5
Total dept Total inveet capital−common equity

Dept−¿−capital ratio= =
Total invested capital Total invested capital
¿ ∗Common equity
¿ 1−
Common equity
Total invested capital
=1−
TA
¿ ( =1−
ROA
ROE
3 2
=1− = =0.4
5 5
)
Dept−¿−capital ratio=40
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Problem # 4-15
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Given:
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Sales: $200,000; Net income: $15,000; and the balance sheet.

aC s
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Required:
 How much the ROE change?

 What will be the new quick ratio
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Method/Solution:
current assets 210000

current ratio= = =4.2 x
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current liabilities 50000

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Net Income 15000

ROE= = =7.5
Common Equity 200000
current assets−inventories 210000−150000
Quick ratio=
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= =1.2
current liabilities 50000
 Current assets needed to reach industry current ratio

current assets
current ratio= =2.5 Therefore
50000
Current assets = 2.5*50000 current assets = $125,000

 Inventories to be sold:
Page 6 of 5
Inventories to be sold = $210000 – $125000 = $85,000
 The new ROE after inventory sold.
Net Income 15000
ROE= = =0.1304 ROE=13.04
Common Equity 200000−85000
The ROE increases to 13% by selling the inventory and reducing common equity
current assets−inventories 125000−(150000−85000) 125000−65000

Quick ratio= = = =1.2 x
current liabilities 50000 50000
Quick ratio=1.2 x The quick ratio remain the same as ratio deducts inventories from
current assets
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Financial Management FINA.

3010 Name: Gbandi Nikabou

Annual sales of $7,300,000

 What is its account receivable balance? Assuming that it uses a 365-days/year

Account receivables=DSO∗Avg . sales per year

Account receivables=40 days∗ ( $365

Account receivables=$ 8,000,000

Doublewide Dealers has:

ROA = 10%, and 2% profit margin

 Total assets turnover

Sales ROA 0.10

Total Assets Turnover= = = =5.0 x

Total Assets Turnover=5.0 x

 What is its equity multiplier

ROE=Profit Margin∗Total AssetsTurnover∗Equity multiplier

E quity multiplier =1.5

Duval manufacturing reported the following information:

Net Interest A/P and Common

 Calculate its basic earning power (BEP)

EBIT = EBT + interest expense = $923076.923 + $225,000 = $1148077

Net income Net Icome $ 600000

Total Asset=$ 7,500,000

EBIT $ 1, 148 , 077

BEP= = =0.15307 BEP=15.31

 Calculate its return on equity (ROE)

Total capital = total Assets – Liabilities = $7,500,000 - $1,000,000 = $6,500,000

Common Equity = 60% * Total capital = 0.6*$6,500,000 = $3,900,000

 Calculate its return on invested capital (ROIC)

EBIT (1−T ) $ 1148076.923 (1−0.35)

Sales/Total assets 1.5x

Return on assets (ROA) 3.0%

Return on equity (ROE) 5.0%

Total dept Total inveet capital−common equity

Sales: $200,000; Net income: $15,000; and the balance sheet.

 How much the ROE change?

current assets 210000

current liabilities 50000

Net Income 15000

 Current assets needed to reach industry current ratio

Current assets = 2.5*50000 current assets = $125,000

current assets−inventories 125000−(150000−85000) 125000−65000

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