Please Need Help With This Question ABC's return on equity was very poor lastyear, but management has come up with aplan to improve things. The new plan callsfor a debt ratio of 69 percent, which willgenerate interest expenses of $363,000 peryear. Management projects that theoperating profit margin will be 13.3percent on sales of $15 million. Theyproject a total asset turnover ratio of 2.7and a tax rate of 40 percent. Given thatinformation, what will be ABC's ROE underthe new plan?

To calculate ABC's Return on Equity (ROE) under the new plan, we need to follow these steps: Step 1:…

Answered: ABC's return on equity was very poor…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 10P

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Roland & Company has a new management team that has developed an operating plan to improveupon last year’s ROE. The new plan would place the debt ratio at 55 percent, which will result ininterest charges of $7,000 per year. EBIT is projected to be $25,000 on sales of $270,000, it expects tohave a total assets turnover ratio of 3.0, and the average tax rate will be 40 percent. What does Roland& Company expect its return on equity to be following the changes?
Roland Company has a new management team that has developed an operating plan to improve upon last year’s ROE. The new plan would place the debt ratio at 55%, which will result in interest charges of 7,000 per year. EBIT is projected to be 25,000 on sales of 270,000, it expects to have a total asset turnover ration of 3.0, and the average tax rate will be 40%. What does Roland Company expect its return on equity (ROE) to be following the changes?
JunJun & Co. has debt ratio of 0.50, a total asset turnover of 0.25 and a profit margin of 10%. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 14% and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14% profit margin, is required to double the return on equity? (SHOW SOLUTION) a. 0.75 b. 0.70 c. 0.65 d. 0.55
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Apex Ltd. is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to $2 million as a result of the just completed asset expansion. Fixed assets total $1 million, and Apex wants to maintain a 60 percent debt ratio. Its interest cost on all debt is 8 percent. Three different current asset levels are being evaluated by the firm. These are (i) a tight policy requiring current assets of 45% of projected sales (ii) a moderate policy with current asset levels being 50% of projected sales (iii) a relaxed policy with current assets being 60% of projected sales. The firm's tax rate is 40%. EBIT = $240,000. What is the expected return on equity under each current asset level?
Ian Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president is unhappy with the current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 15% and (2) by increasing total assets turnover. What new asset turnover ratio, along with the 15% profit margin, is required to double the return on total assets? (SHOW SOLUTION) a. 35% b. 45% c. 40% d. 50%
Payne Products had $2.4 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $2 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 10%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 14% of sales. Payne's tax rate is 35%, a. What is the expected return on equity under each current asset level? Round your answers to two decimal places. Tight policy % 76.77 Moderate policy Relaxed policy 9.04 5.05 1% b. In this problem, we have assumed that the level of expected sales is…
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The return on equity was barely 3% but the managers prepared a plan to improve the situation. It requires a 60% ratio of total doubt, which will produce interest charges of $ 300 000 annul. They project an EBIT of $ 1 000 000 on sell of $ 10 000 000 and expect to have a total asset turnover ratio of 2.0 Under such conditions the tax rate will be 34% If changes are made, what will the return on equity be?
Dubs & Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%. The CEO is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished by increasing the profit margin to 14% and increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14% profit margin, is required to double the return on equity?
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of…
JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10percent. The president is unhappy with the current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 15 percent and (2) by increasing the total assets turnover.What new asset turnover ratio, along with the 15 percent profit margin, isrequired to double the return on assets?a. 35%b. 45%c. 40%d. 50%

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