a) ATM's turnover was $ 7,100 and its total assets were $ 4,500 while its debt-to-equity...

a) ATM's turnover was $ 7,100 and its total assets were $ 4,500 while its debt-to-equity ratio is 1.40. If the rate of return on equity reaches 10%, what is his net profit?

b) ATM announces a dividend increase. In what way can it be interpreted by the market as good news? As bad news?

Solutions

Expert Solution

We know that the debt-to-equity ratio is 1.40. That is, for each $1 of equity, there is $1.40 of debt.

The total assets are funded by debt and equity.

Therefore, (total assets / equity) = (debt + equity / equity) = (1.40 + 1) / 1 = 2.40

ROE = (net profit / sales) / (sales / total assets) * (total assets / equity)

Let us say the net profit is X. Then :

10% = (X / $7,100) * ($7,100 / $4,500) * (2.40)

X = $187.50

Net profit is $187.50

It can be interpreted as good news because dividends are returns for the shareholders. Shareholders invest their capital with the objective of earning returns on their investment. Dividends are a type of return, along with capital appreciation. If the dividend is increased, it can be interpreted as a sign that the higher dividends will continue in the future. This is good news because it means higher returns for shareholders.

It can be interpreted as bad news because dividends are the distribution of the company's earnings. If the company is distributing to shareholders rather than investing in business opportunities, it could be interpreted as bad news because the company may not have enough opportunities to invest in. This is bad news because the future growth prospects for the company may be low, due to lack of adequate investment opportunities.

jeff jeffy answered 1 year ago

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