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    Prac

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    The document contains solutions to finance quiz questions from Lahore School of Economics. Question 1 solves for a company's profit margin using DuPont analysis given its return on assets and equity. Question 2 calculates a company's current interest expense coverage ratio. Question 3 part a calculates return on assets and part b calculates the new current ratio if additional debt is taken on.

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    Prac

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    John Bernie
    37 views3 pages
    The document contains solutions to finance quiz questions from Lahore School of Economics. Question 1 solves for a company's profit margin using DuPont analysis given its return on assets and equity. Question 2 calculates a company's current interest expense coverage ratio. Question 3 part a calculates return on assets and part b calculates the new current ratio if additional debt is taken on.

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    The document contains solutions to finance quiz questions from Lahore School of Economics. Question 1 solves for a company's profit margin using DuPont analysis given its return on assets and equity. Question 2 calculates a company's current interest expense coverage ratio. Question 3 part a calculates return on assets and part b calculates the new current ratio if additional debt is taken on.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    37 views3 pages

    Prac

    Uploaded by

    John Bernie
    The document contains solutions to finance quiz questions from Lahore School of Economics. Question 1 solves for a company's profit margin using DuPont analysis given its return on assets and equity. Question 2 calculates a company's current interest expense coverage ratio. Question 3 part a calculates return on assets and part b calculates the new current ratio if additional debt is taken on.

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    © All Rights Reserved
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    of 3

    Lahore School of Economics

    BBA III – FM 1
    Quiz 3 Solution

    Question 1:

    Fama’s French Bakery has a return on assets (ROA) of 10 percent and a return on
    equity (ROE) of 14 percent. Fama’s total assets equal total debt plus common equity
    (that is, there is no preferred stock). Furthermore, we know that the firm’s total assets
    turnover is 5.What is Fama’s profit margin?

    Solution 1:

    The Du Pont analysis of return on equity gives us:

    ROE = ROA  EM OR ROA = PM  TATO


    14% = 10%  EM 10% = PM  5
    1.4 = EM. 2% = PM.

    ROE = PM  TATO  EM
    14% = PM  5  1.4
    14% = PM  7
    2% = PM.

    Question 2:

    Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10
    percent annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax
    rate is 40 percent, and its net profit margin on sales is 6 percent. If the company does not
    maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and
    bankruptcy will result. What is Alumbat’s current TIE ratio?

    Solution 2:

    TIE = EBIT/Interest
    So find EBIT and Interest
    Interest = $800,000  0.1 = $80,000.
    Net income = $3,200,000  0.06 = $192,000.
    Pre-tax income = $192,000/(1 - T) = $192,000/0.6 = $320,000.
    EBIT = $320,000 + $80,000 = $400,000.
    TIE = $400,000/$80,000 = 5.0.

    1
    Lahore School of Economics
    BBA III – FM 1
    Quiz 3 Solution
    Question 1:

    Miller Technologies recently reported the following balance sheet in its annual report (all
    numbers are in millions of dollars):

    Cash $ 100 Accounts payable $ 300


    Accounts receivable 300 Notes payable 500
    Inventory 500 Total current liabilities $ 800
    Total current assets $ 900 Long-term debt 1,500
    Total debt $2,300
    Common stock 500
    Retained earnings 400
    Net fixed assets 2,300 Total common equity $ 900
    Total assets $3,200 Total liabilities and equity $3,200

    Miller also reported sales revenues of $4.5 billion and a 20 percent ROE for this same
    year.
    a) What is Miller’s ROA?
    b) Miller Technologies is always looking for ways to expand their business. A plan has
    been proposed that would entail issuing $300 million in notes payable to purchase
    new fixed assets (for this problem, ignore depreciation). If this plan were carried
    out, what would Miller’s current ratio be immediately following the transaction?

    Solution 1:

    a) ROA = NI/Assets.
    Total assets = $3,200,000,000 (from the balance sheet).
    ROE = NI/Common equity = 0.20, with Common equity = $900,000,000 (from
    the balance sheet).

    0.20 = NI/$900,000,000
    NI = $180,000,000.

    So, ROA = $180,000,000/$3,200,000,000 = 0.05625, or 5.625%.

    2
    b) Current liabilities increase by $300 million, while current assets do not
    change.

    Current ratio = CA/CL.


    = $900,000,000/($800,000,000 + $300,000,000)
    = $900,000,000/$1,100,000,000 = 0.818.

    Question 2:

    Russell Securities has $100 million in total assets and its corporate tax
    rate is 40 percent. The company recently reported that its basic earning
    power (BEP) ratio was 15 percent and its return on assets (ROA) was 9
    percent. What was the company’s interest expense?
    Solution 2:

    BEP = EBIT/TA
    0.15 = EBIT/$100,000,000
    EBIT = $15,000,000.

    ROA = NI/TA
    0.09 = NI/$100,000,000
    NI = $9,000,000.

    EBT = NI/(1 - T)
    EBT = $9,000,000/0.6
    EBT = $15,000,000.

    Therefore interest expense = $0.

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