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Date Posted: 04:52:29 01/24/00 Mon
Author: Charles Hodges
Subject: Re: quiz #14
In reply to: allison 's message, "quiz #14" on 12:58:41 01/23/00 Sun

14. (4 points) 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?

this question was posted in error, as the question uses matieral in chapter 3. This type of question is not on quiz 1.

This problem is commonly called a ratio algebra problem. Here is one solution method.

Since profit margin is 8% = Net Income/Sales, one can solve for sales.

Since total assets turnover equals= Sales/Total Assets then one can solve for Total Assets.

Since debt ratio = Total Liabilities / Total Assets = .4, then one can solve for Debt.

Since the balance sheet equation is Total Assets = Total Liabilities + Equity, and you now have Total Assets and Total Liabilities, one can solve for Book Value of Equity.

A HINT. IF ONE OF THESE PROBLEMS HAS NO NUMBERS AND ONLY RATIOS, AN EASY WAY TO SOLVE THE PROBLEM IS TO ASSUME THAT ONE OF THE NUMBERS IS 100. USING 100 FOR ONE NUMBERS ALLOWS ONE TO SOLVE FOR OTHER NUMBERS. MANY PEOPLE FIND IT EASIER TO WORK WITH NUMBERS RATHER THAN MANIPULATING RATIOS. IF POSSIBLE, DUE TO THEIR FREQUENT USE, I TRY TO SUBSTITUTE THE 100 FOR TOTAL ASSETS OR ALTERNATELY SALES.

Hope this helps.
> I am doing the old quiz and have an answer to question
> 14 but I am not sure if it is correct. Can you please
> provide the answer or the logic beyond the problem.
>
> Thanks

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