Question

The most recent income statement and balance sheet for the T. McGraw Corporation are as follows: T. MCGRAW CORPORATION Financial Statements Income Statement Sales - Costs Taxable Income - Taxes (34%) Net Income $10,000 7,500 $ 2,500 850 $ 1,650 Retained earnings Dividends $ 660 $ 990 Balance Sheet Current assets Fixed assets Total $5,000 10,000 $15,000 Total debt Owner's Equity Total $ 6,000 9,000 $15,000 McGraw is forecasting a 20% increase in sales for the coming year; assets vary directly with sales, while liabilities and equity do not (this condition applies for 5.6 only).

.1) Profit Margin (PM)

.2) Retention ratio (R)

.3) return on assets (ROA)

.4) Return on equity (ROE)

.5) DEBT equity ratio (D/E)

.6) Use the ratios computed to calculate the external financing needed (EFN)

Answer 1

1]

PM = net income / sales = 1650 / 10000 = 16.50%

2]

RR = retained earnings / net income

RR = 660 / 1650 = 40%

3]

ROA = net income / total assets  

ROA = 1650 / 15000 = 11%

4]

ROE = net income / equity

ROE = 1650 / 9000 = 18.33%