Homework Answers
1. First we will calculate debt as per below:
Assets (given) = $120000
Total debt ratio = Debt / Assets = 30%
Debt = $120000 * 30% = $36000
Next, we will calculate equity as per below:
Total assets = Debt + Equity
Putting the values in the above equation, we get,
$120000 = $36000 + Equity
Equity = $120000 - $36000 = $84000
Next, we will calculate interest as per below:
Interest = 6% * Debt
Interest = 6% * $36000 = $2160
Next we will calculate Earnings before tax as per below:
Earnings before tax = EBIT - Interest
Earnings before tax = $49000 - $2160 = $46840
Next we will calculate Net income as per below:
Net income = Earnings before tax * (1 - Tax rate)
Net income = $46840 * (1 -34%)
Net income = $46840 * 66%
Net income = $30914.4
Now, we will calculate the expected ROE as per below:
Expected ROE = Net income / Equity * 100
Expected ROE = $30914.4 / $84000 * 100
Expected ROE = 36.803%
2. Net profit margin = Net income / Revenue * 100
Putting the values in the above formula, we get,
Net profit margin = $7772 / $80000 * 100
Net profit margin = 9.715%
Return on assets = Net income / Total assets * 100
Putting the values in the above formula, we get,
Return on assets = $7772 / $167000 * 100
Return on assets = 4.6539%
Return on equity = Net income / Total equity * 100
Putting the values in the above formula, we get,
Return on equity = $7772 / $49000 * 100
Return on equity = 15.861%
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