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Date Posted: 14:21:44 07/10/00 Mon
Author: Alex Westberry
Subject: Correction for #'s 14, 18, and 20
In reply to: Alex Westberry 's message, "Re: Sample Mid Term from Hodges" on 12:24:18 07/10/00 Mon

Here are the corrected answers for #'s 14,18,20 per Professor Hodges:

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?

SALES = 31.25
TOTAL ASSETS = 15.625
TOTAL DEBT = 6.26
TOTAL EQUITY = TOTAL ASSETS - TOTAL DEBT
TOTAL EQUITY = 9.375 or 9.38
BOOK VALUE OF OWNER'S EQUITY IS $9.38

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

THE CORRECT ANSWER IS D. 6000

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 YOU ALSO INCREASE THE VALUE OF INVENTORY BY THE SAME AMOUNT, THEREFORE CURRENT ASSETS ARE ALSO INCREASED.
THE CORRECT ANSWER WOULD BE $600,000.

CA + X / CL + X = 2.0

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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Replies:

  • Correction for #'s 14, 18, and 20 -- Alex Westberry, 14:21:53 07/10/00 Mon
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