The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) 2021 Assets Cash and securities $ 6,000 Accounts receivable 15,000 Inventories 15,000 Total current assets $ 36,000 Net plant and equipment 24,000 Total assets $ 60,000 Liabilities and Equity Accounts payable $ 18,090 Accruals 8,910 Notes payable 6,000 Total current liabilities $ 33,000 Long-term bonds 12,000 Total liabilities $ 45,000 Common stock 4,050 Retained earnings 10,950 Total common equity $ 15,000 Total liabilities and equity $ 60,000 Income Statement (Millions of $) 2021 Net sales $ 90,000 Operating costs except depreciation 83,700 Depreciation 1,920 Earnings before interest and taxes (EBIT) $ 4,380 Less interest 1,080 Earnings before taxes (EBT) $ 3,300 Taxes (25%) 825 Net income $ 2,475 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $866.25 Int. rate on notes payable & L-T bonds 6% Federal plus state income tax rate 25% Year-end stock price $59.40 a. 22.00% b. 10.78% c. 22.60% d. 29.20% e. 16.50% What is the firm's ROE? Do not round your intermediate calculations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)	2021
Assets
Cash and securities		$	6,000
Accounts receivable			15,000
Inventories			15,000
Total current assets		$	36,000
Net plant and equipment			24,000
Total assets		$	60,000

Liabilities and Equity
Accounts payable		$	18,090
Accruals			8,910
Notes payable			6,000
Total current liabilities		$	33,000
Long-term bonds			12,000
Total liabilities		$	45,000
Common stock			4,050
Retained earnings			10,950
Total common equity		$	15,000
Total liabilities and equity		$	60,000

Income Statement (Millions of $)	2021
Net sales		$	90,000
Operating costs except depreciation			83,700
Depreciation			1,920
Earnings before interest and taxes (EBIT)		$	4,380
Less interest			1,080
Earnings before taxes (EBT)		$	3,300
Taxes (25%)			825
Net income		$	2,475

Other data:
Shares outstanding (millions)			500.00
Common dividends (millions of $)		$866.25
Int. rate on notes payable & L-T bonds			6%
Federal plus state income tax rate			25%
Year-end stock price			$59.40

a. 22.00%

b. 10.78%

c. 22.60%

d. 29.20%

e. 16.50%

What is the firm's ROE? Do not round your intermediate calculations.

Expert Solution

Step 1: Definition of ratio analysis

Ratio analysis helps to analyze the financial statements of the company.The Management can make decisions on the basis of these ratios. It is also helpful to compare two or more financial information. Return on equity can be calculated by dividing the net income by the total common equity.