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Date Posted: 12:24:18 07/10/00 Mon
Author: Alex Westberry
Subject: Re: Sample Mid Term from Hodges
In reply to: Karen Gilmore 's message, "Sample Mid Term from Hodges" on 09:44:19 07/01/00 Sat

Professor Hodges,

I have some questions about the following problems from the Sample Quiz. I'll email this to you and post it in the Conference Room. Thanks. Alex Westberry


14. Net Income is $2.50, the net profit margin is 8%, the total asset turnover is 2.0, and the debt ratio is 40%. What is the book value of owner's equity?

I HAVE WORkED THROUGH THIS PROBLEM SEVERAL TIMES AND WAS ABLE TO COME UP WITH THE SAME ANSWERS AS BOB AND KAREN, BUT WAS UNABLE TO COME UP WITH THE BOOK VALUE.


18. Net Income = $12,000, Tax rate = 40%, Total revenues = $40,000, Total operating costs = $14,000. Interest expenses =

a. 0 b. $26,000 c. $20,000 d. $6,000 e. none of the above

SHOULDN'T THE CORRECT ANSWER BE D. 6000? I WORKED THROUGH THIS PROBLEM AND GOT THE FOLLOWRING INFO:

Total Revenue 40,000
Total Op. Costs 14,000
EBIT 26,000
Int. Exp 6,000
EBT 20,000
Taxes(40%) 8,000
Net Income 12,000


20. The Arpad Company has $2,600,000 in current assets and $1,000,000 in current liabilities. Its initial inventory level is $750,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Arpad's short-term debt(notes payable) increase without pushing its current ratio below 2.0?

IF YOU INCREASE THE NOTES PAYABLE WOULDN'T YOU ALSO INCREASE THE LEVEL OF INVENTORY BY THE SAME AMOUNT? SO WOULDN'T $600,000 BE THE CORRECT ANSWER?

Current Assets 2,600,000 + 600,000 = 3,200,000
Current Liabilities 1,000,000 + 600,000 = 1,600,000

3,200,000 / 1,600,000 = 2.0

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