Question

Warne Enterprises decides to expand its operations by applying for an additional loan of $697,700. As a result, revenue from ordinary activities is expected to increase by $104,600. Financial data (assume average balances) before and after expansion include:

		Before expansion			After expansion
Total assets (average)		$3,488,400			$4,186,000
Total liabilities		930,200			1,627,900
Average shareholders’ equity		2,558,200			2,558,100
Revenue from ordinary activities		1,050,000			1,154,600
Interest expense		69,800			93,000
Other expenses		170,000			210,000
Profit before income tax		810,200			851,600
Income tax expenses (30 per cent)		243,060			255,480
Profit		$567,140			$596,120

Calculate the following. (Round all answers to 2 decimal places, e.g. 15.25. Calculate ROA using profit (not EBIT).)

				Before			After
a.		ROA ratio		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%
b.		ROE ratio		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%
c.		Debt to total assets ratio		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	%
d.		Times interest earned ratio		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	times		$//img.homeworklib.com/questions/e978d400-77aa-11ea-ba1e-f76c4fed2433.gif?x-oss-process=image/resize,w_560$	times

Answer 1

Answer with working notes is given below

a) ROA Ratio Profit Total Assets (average) Before expansion $567,140 16.26% $3,488,400 After expansion $596,120 14.24% $4,186,000 b) ROE Ratio Profit Average shareholders' equity $567,140 $2,558,200 22.17% $596,120 $2,558,100 23.30% c) Debt to Total assets Total Liabilities Total Assets (average) $930,200 $3,488,400 26.67% $1,627,900 $4,186,000 38.89% Times Times d) Times Interest earned ratio Earnings before interest and tax Interest | $880,000 $69,800 12.61 | $944,600 $93,000 10.16 EBIT Working Profit before tax Add: Interest Earnings before interest and tax $810,200 $69,800 $880,000 $851,600 $93,000 $944,600