Question

1）

SME Company has a debt-equity ratio of .57. Return on assets is 7.9 percent, and total equity is $620,000.
a.	What is the equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	What is the return on equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the net income? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a.	Equity multiplier
b.	Return on equity		%
c.	Net income

2）

Some recent financial statements for Smolira Golf Corp. follow.

  

SMOLIRA GOLF CORP. 2017 and 2018 Balance Sheets
Assets									Liabilities and Owners’ Equity
	2017				2018					2017				2018
Current assets									Current liabilities
Cash	$	34,385			$	37,837			Accounts payable	$	36,722			$	42,582
Accounts receivable		17,801				27,766			Notes payable		19,008				16,200
Inventory		36,310				42,632			Other		19,864				24,634
Total	$	88,496			$	108,235			Total	$	75,594			$	83,416
									Long-term debt	$	115,000			$	145,000
									Owners’ equity
									Common stock and paid-in surplus	$	55,000			$	55,000
									Accumulated retained earnings		307,217				344,452
Net plant and equipment	$	464,315			$	519,633			Total	$	362,217			$	399,452
Total assets	$	552,811			$	627,868			Total liabilities and owners’ equity	$	552,811			$	627,868

  

SMOLIRA GOLF CORP. 2018 Income Statement
Sales				$	506,454
Cost of goods sold					359,328
Depreciation					44,463
Earnings before interest and taxes				$	102,663
Interest paid					19,683
Taxable income				$	82,980
Taxes (25%)					20,745
Net income				$	62,235
Dividends	$	25,000
Retained earnings		37,235

  

Smolira Golf Corp. has 20,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2018 was $58.

What is Tobin’s Q for Smolira Golf? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Question 1.

Given, DER= 0.57, RoA=7.9% and total equity= $620,000

Part (a)

Debt Equity Ratio (DER)= Total outside Liabilities (TOL)/ Tangible Net Worth (TNW)

Substituting the given values,

0.57=TOL/$620,000. Therefore, TOL= $620,000*0.57 = $353,400.

Total assets= Total liabilities + total equity= $353,400+$620,000 = $973,400

Equity Multiplier= Total assets/Total shareholders fund

Therefore, Equity Multiplier= $973,400/$620,000 = 1.57

Part (b)

Return on assets ratio (RoA) = Net Income/Total assets

Hence, 7.9%= Net income/$973,400

Therefore, Net income= 7.9%*$973,400= $76,898.60

Return on equity= Net income/ Shareholders equity = $76,898.60/$620,000

= 12.403%, rounded to 12.40%

Part (c)

Net Income= Total assets*RoA= $620,000*7.9%= $76,898.60

Question 2:

Given,

Total assets of SMOLRIA GOLF CORP as at the end of 2018= $627,868

Number of shares as at the end of 2018= 20,000. Market price per share= $58

Tobin’s Q Ratio = Total Market Value of the firm/ Total Asset Value of the firm

Substituting the given values,

Market Value of the firm at the end of 2018= Number of shares* Market Price per share

= 20,000*$58 = $58 = $1,160,000

Hence, Tobin’s Q= $1,160,000/$627,868 = 1.847522091 Rounded to 1.85