Question

Edit View History Bookmarks Window Help Help ter 3 Last year, K9 WebbWear, Inc. reported an ROE of 20 percent. The firm's debt ratio was 55 percent, sales were $20 million, and the capital intensity was 1.25 times. This year, K9 Webb Wear plans to increase its debt ratio to 60 percent. The change will not affect sales or total assets, however, it will reduce the firm's profit margin to 8 percent. Calculate the net income and profit margin for K9 Webb Wear last year. (Enter your answer in milions of dollars rounded to 2 decimal places. Round your percentage answer to 2 decimal places.) Net Income last year) Profit margin last year) 225 million 11.25% By how much will the change in K9 Webb Wear's debt ratio affect its ROE? ROE (his year we decrease s < Prev 17 of 20 Next >

Answer 1

last year:

capital intensity = total asset/ sales

1.25= total assets/ $ 20 m

total assets = $ 20 m * 1.25 = $25 m

debt ratio= total liabilities/ total assets

0.55= total debt/ $25 m

total debt = $25 m * 0.55=$ 13.75 m

total equity= $ 25 m - $ 13.75 m = $ 11.25 m

ROE = 0.20 = net income / $ 11.25 m = 0.20* 11.25= $ 2.25 m

profit margin= $ 2.25 m / $ 20 m = 11.25 %

this year:

profit margin = 8 % = net income / $20 m

net income = 0.08* $ 20 million = $ 1.6 m

and total debt = $ 25 m *0.60= $ 15 m

total equity = $ 25 m - $ 15 m = $ 10 m

ROE = $ 1.6 m / $ 10 m = 16 percent

decrease of 4 % (20-16)