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Date Posted: 06:50:09 09/09/02 Mon
Author: Dr. D.
Subject: Re: p.169 #13,14
In reply to: Bonnie 's message, "p.169 #13,14" on 13:47:34 09/08/02 Sun

For #13:
since the firm has no debt, ROE = ROA. So, all we need is to calculate ROA.

To get Total Assets, we need Assets and Net Income.

For Assets, use Sales = 5,000 and TATO - 2 ==> Assets = 2,500

For Net Income: EBIT = 1,500. Since the firm has no Debt, there is no interest. Therefore, EBT also = 1,500
If the tax rate is 30%, NI = 1,500,000 - 450 = 1,050

So, ROA = ROE = 1,050/2,500 = 42%

#14 is a bit involved. At present, the firm has total assets of 6mm and debt of 3mm. Since they will have an addition to retained earnings of $600,000, they will have (without borrowing) total assets of 6.6MM, Debt of 4MM and equity of 3.6MM

Now comes the math: if they raised "X" dollars of debt, they would have ($3MM + X) dollars of debt and ($6.6MM of Assets). So, their new debt ratio would be:

(3,000,000 + X)/(6,600,000 + X)

Set this to 55% and solve for X ==> $1,400,000


>I cannot get the correct answers for these two. they
>are part of the additional questions for ch.5

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