Question

1. You are given the following financial data for Pelican Paper Inc. and Timberland Forest Inc.

	Pelican Paper	Timberland
Total assets	$10,000,000	$10,000,000
Common stockholder equity	$ 9,000,000	$ 5,000,000
Total debt	$ 1,000,000	$ 5,000,000
Interest expense	$     100,000	$     500,000
Total Sales	$25,000,000	$25,000,000
EBIT	$   6,250,000	$ 6,250,000
Earnings available for common stockholders	$   3,690,000	$ 3,450,000

1) Calculate each firms:

a) total asset turnover

b) equity ratio

c) financial leverage multiplier

2) Use Dupont system formula to calculate each firm's ROA and ROE.

Answer 1

1) A) Total Asset Turnover = Total Sales / Total Assets

B) Equity Ratio = Total Equity / Total Assets

C) Financial Leverage Multiplier = Total Assets / Total Equity

2) DuPont ROE = Net Profit Margin * Total Assets Turnover * Financial Leverage Multiplier

Net Profit Margin = Net Income / Total Sales

DuPont ROA = Net Profit Margin * Total Asset Turnover