Question
In: Finance
IYou have a bike store. Your assets consist of $10,400 in inventory, $1,000 in equipment (phones,...
IYou have a bike store. Your assets consist of $10,400 in inventory, $1,000 in equipment (phones, computers, etc.) and $600 cash. You are capitalized with $10,000 owners’ equity and $2,000 debt at 6%. Assume your only variable cost are the bikes you purchase from the manufacturer, $60/bike. Your fixed costs total $2500.
During the year you purchased 250 bikes and sold them at $80/bike. But you only paid for half the bikes you bought; the rest were sold to you “on credit.” Your profits tax rate is 20%. What is your ROE for the year?
You “took out” all the profits. Do the “money in – money out” to calculate the net change in cash for the year. What does your balance sheet look like at the end of the year?
IISuppose a business is capitalized with $500,000 in Owners’ Equity plus $400,000 in loans which carry a 5% interest rate. This year’s projected revenue is $1 million, with variable and fixed costs $600,000 and $100,000 (no depreciation), respectively. Profits taxes are 25%.
Calculate the coverage ratio for the year. Do it two ways: By moving down the waterfall, to see the money available to service debt. And by moving up from the bottom of the waterfall – that is, adding back taxes and interest to profits.
Solutions
Expert Solution
You have asked two unrelated questions in the same post. I will address all the sub parts of the first question. Plesae post the second question separately.
Q - I
ROE = Net income / Equity
Equity = 10,000
| Parameter | Linkage | $ |
| Sales | A = 250 x 80 | 20,000 |
| Variable costs | B = 250 x 60 | 15,000 |
| Fixed costs | C | 2,500 |
| EBIT | E = A - B - C | 2,500 |
| Interest | F = 6% x 2000 | 120 |
| EBT | G = E- F | 2,380 |
| Taxes | H = 20% x G | 476 |
| Net income | I = G - H | 1,904 |
Hence, ROE = 1,904 / 10,000 = 19.04%
| Cash Inflow = Sales | A | 20,000 |
| Cash outflows | ||
| Purchases | 50% x B | 7,500 |
| Fixed costs | C | 2,500 |
| Interest | F | 120 |
| Taxes | H | 476 |
| Dividends | =Net income | 1904 |
| Total outflows | sum of above | 12,500 |
| Net change in cash for the year | 7,500 |
Balance Sheet at the end of the year
Adding opening cash balance of 600 to the figure above, we get $ 8,100 as the closing cash balance for the year.
| ASSETS | $ | LIABILITIES & EQUITY | $ | |
| Cash & balance | 8,100 | Accounts payable | 7,500 | |
| Inventory | 10,400 | Debt | 2,000 | |
| Equipment | 1,000 | Equity | 10,000 | |
| Total | 19,500 | Total | 19,500 |
jeff jeffy answered 4 months agoRelated Solutions
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You have a bike store. Your assets consist of $10,400 in inventory,
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are capitalized with $10,000 owners’ equity and $2,000 debt at 6%.
Assume your only variable cost are the bikes you purchase from the
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