Question

16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and raise the debt ratio to 0.40 from 0.0 without changing total assets. It plans to use the proceeds of the debt issue to retire some equity using a share repurchase. How much cash should Lowell borrow?

a.            $228,000

b.            $288,000

c.            $328,000

d.            $388,000

e.            $492,000

17. Nashua Inc.'s debt ratio is .25. That is, for every $100 of total assets, it has borrowed $25. What would be the value of its equity multiplier to use in a DuPont equation? Hint: You might need to work out the equation for equity multiplier from the debt ratio equation!

a.            0.25

b.            1.00

c.            1.25

d.            1.33

e.            4.00

18. XYZ Corp.'s sales last year were $300,000, and its net income was $20,000. What was its profit margin?

a. 6.67%

b. 7.66%

c. 8.21%

d. 8.63%

e. 9.06%

19. ABC Corp. is an all equity firm with total assets of $400,000, with sales of$600,000 and net income of $25,000. Management wants to lower costs to increase ROE to around 15%. They do not plan on changing sales or issuing debt. What profit margin would be needed to achieve this higher ROE? Hint: DuPont Equation - What is equity multiplier here?

a.            9.45%

b.            9.85%

c.            10.00%

d.            10.45%

e.            10.85%

20. Weston Industries had soles of $300,000, assets of $175,000, a profit margin of 5.2%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $50,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt/assets ratio, sales, and costs remained constant, how much would the ROE have changed? Hint: First Calculate ROE for the present amount of assets – Does the profit margin change after the reduction in assets?

a. 4.28%

b. 4.56%

c. 5.01%

d. 5.52%

e. 6.07%

Answer 1