Exercise 1. Bartley Barstools has an equity multiplier of 2.

4, and its assets are financed

with some combination of long-term debt and common equity. What is its debt-to-assets
ratio?

Exercise 2. Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of
15%. What is its total assets turnover? What is its equity multiplier?
Given: ROA = 10%, Profit margin = 2%, ROE = 15%
ROA = Profit margin x Asset Turnover
Therefore,
Asset Turnover = ROA / Profit margin
= 10 / 2 = 5%
ROE = Profit margin x Asset Turnover x Equity multiplier
15 = 2 x 5 x Equity Multiplier
15 / 10 = Equity Multiplier
Equity Multiplier = 1.5

Exercise 3. A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are
$100 million, and it has total assets of $50 million. What is its ROE?
PM= 2%, EM= 2, sales= $100 million, TA= $50 million
ROE= PM TATO EM
ROE= PM (sales / TA) EM
= 2 (100 / 50) 2= 8%

Exercise 4. Midwest Packaging’s ROE last year was only 3%; but its management has
developed a new operating plan that calls for a debt-to-assets ratio of 60%, which will
result in annual interest charges of $300,000. The firm has no plans to use preferred
stock. Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it
expects to have a total assets turnover ratio of 2.0. Under these conditions, the tax rate
will be 34%. If the changes are made, what will be the company’s return on equity?
Exercise 5. Based on the below financial statement, do the following tasks.
a. What was net operating working capital for 2010 and 2011?
b. What was Bailey’s 2011 free cash flow?

a. Net working capital= Current Assets - Current Liabilities

2008
$72,125 - $25,100 = $47,025
2007
$59,000 - $20,150 = $38,850

b. Free cash flows

FCF = Net income+ Depreciation- increase in working capital
FCF = $22,350+$5000-($47,025-$38,850)=$19,175

Exercise 6.
Exercise 7: