3 In-Class Exc Ch III SOLVED

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Date: Quinnipiac University - School of Business FIN 201 - Fundamentals of Financial Management Solutions - In-class Exercises Chapter III Q1: Ileie, Inc., has a debt-to-equity ratio of 0.37, profit margin of 12 per cent, and return on equity of 20 per cent. What is its equity multiplier? D/E = 0.37 PM = 0.12 ROE = 0.2 EM = TA/TE or EM = 1 + D/E EM = 1 + 0.37 = 1.37x Q2: Spring Park Zoo has a profit margin of 11 per cent, total asset turnover of 1.05, and ROE of 14.41 per cent. a. What is this firm’s debt-equity ratio? PM = 0.11 TAT = 1.05 ROE = 0.1441 D/E =? D/E = TD/TE or D/E = EM – 1 DuPont Identity ROE = PM × TAT × EM ROE = 0.1441 = 0.11 × 1.05 × EM  0.1441 = 0.1155 × EM  EM = 0.1441/0.1155 = 1.247619x D/E = EM – 1 = 1.247619x – 1 = 0.247619x b. What is the Zoo’s total debt ratio? TDR = TD/TA D/E = TD/TE = 0.247619  TD = 0.247619 × TE  TE = TD/0.247619 = 1/0.247619 × TD TE = 4.03846 × TD TA = TD + TE = TD + 4.03846 × TD = 5.03846 × TD TDR = TD/TA = TD/(5.03846 × TD) = 1/5.03846 = 0.198473  19.8473% Q3: Calculate Pure, Inc.’s ROE using the ratio function and then confirm this value computing both iterations of the DuPont identity. Copyrighted by RBT

Date: Pure, Inc. 2021 Income Statement Pure, Inc. Balance Sheets as of December 31, 2021 Sales $187,370 Assets Liabilities & Owners’ Equity Cost of Goods Sold $126,203 Accts Payable $2,600 Depreciation $5,333 Cash $3,307 Notes Payable $2,116 EBIT $55,834 Accts. Receivable $5,781 Other $107 Interest Paid $1,430 Inventory $13,782 Current Liabilities $4,823 Taxable Income $54,404 Current Assets $22,870 L-T Debt $16,16 0 Taxes $19,041 Net Income $35,363 Net Fixed Assets Common Stock $38,00 0 Plant & Equipment $75,225 Add Ret Earnings $39,11 2 Dividends $11,905 Total Equity $77,11 2 Retained Earnings $23,458 Total Assets $98,095 Tot. Debt & Equity $98,09 5 1. ROE = NI/ TE = $35,363/$77,112 = 0.458593  45.8593% 2. ROE = ROA × EM ROA = NI/ TA = $35,363/$98,095 = 0.360497  36.0497% EM = TA/ TE = $98,095 /$77,112 = 1.272111x ROE = ROA × EM = 0.360497 × 1.272111 = 0.458593  45.8593% 3. ROE = PM × TAT × EM PM = NI/ Sales = $35,363/$187,370 = 0.188734  18.8734% TAT = Sales/ TA = $187,370/$98,095 = 1.910087x EM = 1.272111x ROE = PM × TAT × EM = 0.188734 × 1.910087 × 1.272111 = 0.458593  45.8593% Q4: Candy Co. has total assets of $9,300,000 and a total asset turnover of 2.43 times. Assume the return on assets is nine per cent. What is its profit margin? TAT = $9,300,000 TAT = 2.43x ROA = 0.09 PM = NI/ Sales =? TAT = Sales/ TA = 2.43x  Sales/ TA = 2.43x  Sales/ $9,300,000 = 2.43x  Sales = 2.43 × $9,300,000  Sales = $22,599,000 ROA = NI/ TA = 0.09  NI/ $9,300,000 = 0.09  NI = $9,300,000 × 0.09  NI = $837,000 PM = NI/ Sales = $837,000/ $22,599,000 = 0.037037  3.7037% Copyrighted by RBT

Date: Q5: Design Company has a debt-to-equity ratio of 1.42. The firm’s return on assets is 7.67 per cent, and its total equity is $710,000. What is Design Company’s net income? D/E = TD/TE = 1.42x ROA = 0.0767 TE = $710,000 NI =? DuPont ROE = ROA × EM EM = 1 + D/E  1 + 1.42x = 2.42x ROE = ROA × EM  ROE = 0.0767 × 2.42x = 0.185614  18.5614% ROE = NI/ TE ROE = NI/ TE  ROE = 0.185614 = NI/ $710,000  NI = 0.185614 × $710,000 = $131,785.94 Q6: OuG Care’s 700,000 shares trade at $80 per share; The company’s balance sheet shows: $10 million in assets, $1 million in current liabilities, and $3 million in long-term debt. What is the firm’s market/book ratio? N o of Shares Outstanding = 700,000 shares P = $80 TA = $10,000,000 CL = $1,000,000 L-T D = $3,000,000 M/B = P/BVPS =? BVPS = TE/ N o of Shares Outstanding TE =?  TA = TD + TE  TE = TA – TD = $10,000,000 - $1,000,000 - $3,000,000 = $6,000,000 BVPS = TE/ N o of Shares Outstanding = $6,000,000/ 700,000 shares = $8.5714 M/B = P/BVPS =$80/ $8.5714 = 9.3333x Q7: Reno Recyclers has EPS of $2.20, sales per share of $3.35, and a Price-to-Sales ratio of six times. What is its P/E ratio? EPS = $2.20 SPS = $3.35 P/S = 6x P/E = P/EPS =? P/S = P/SPS = 6x  P/$3.35 = 6x  P= 6 × $3.35 = $20.1 P/E = P/EPS  P/E=$20.1/$2.20 = 9.1364x Copyrighted by RBT

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