Question

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A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is? 1. 2. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm's charged coverage? 3. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is?

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1. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is?

2. A firm has operating profit of $200,000 after deducting lease payments of $40,000. Interest expense is $60,000. What is the firm’s charged coverage?

3. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is?

Answer 1

QUESTION 1 -

Debt Equity ratio = 50% = 0.50

Debt = $300,000

Net income = $90,000

$\fn_cm Debt\, Equity\, ratio = \frac{Total\, liabilities}{Shareholders'\, equity}$

$\fn_cm 0.50 = \frac{300,000}{Shareholders'\, equity}$

$\fn_cm Shareholders'\, equity = \frac{300,000}{0.50}$

$\fn_cm Shareholders'\, equity = 600,000$

$\fn_cm Return\, on\, Equity\, (ROE) = \frac{Net\, Income}{Shareholders'\, equity}$

$\fn_cm Return\, on\, Equity\, (ROE) = \frac{90,000}{600,000}$

$\fn_cm Return\, on\, Equity\, (ROE) = 0.15$

ROE = 15%