Question

1. Firm AAA’s stock is currently trading at $2 per share. The Total Shares Outstanding of Firm AAA is 3 billion. Based on this information is this a Mid-Cap firm, Micro-Cap firm, Large Cap firm, or small cap firm?
2. Firm DDD has Current Assets = $50 and Current Liabilities = $100. Which of the following is the correct Current Ratio of this firm? a. 0.5    b. 0.005        c. 1          d. 2
3. Which of the following financial ratio is forward-looking: (I) Asset turnover ratio, (II) Current ratio; (III) Price to Book ratio; (IV) Price to Earnings ratio.
4. Dividend per Share $15, Earnings per Share $150, Price Per Share $300.
   1. Based on the above information, which of the following is the correct result of Payout Propensity Ratio? 5%, 10%, 50%, or 100%
   2. Based on the above information, which of the following is the correct result of Dividend Yield? 5%, 10%, 50%, or 100%
5. Income Statement

EBIT 140

Interest Expense 50

Balance Sheet Statement

Total Assets (including Current Assets and Non-Current Assets) 1300

Long-Term Debt 400

Total Stockholders' Equity (Book Value of Equity) 1600

Tax Rate 35%

A. By computing the Leverage Ratio of this firm, which of the following is correct?

a. The firm has 0% Long-Term Debt and 100% Equity in Capital Structure

b. The firm has 20% Long-Term Debt and 80% Equity in Capital Structure

c. The firm has 80% Long-Term Debt and 20% Equity in Capital Structure

d. The firm has 100% Long-Term Debt and 0% Debt in Capital Structure

B. Which of the following is the correct (Return on Equity) ROE of this firm?

a) 0%     b) 4.50%    c)5.69%     d)3.66%

Answer 1

1. The market capitalization=Shares outstanding*Price per share=3 billion *$2=$6 billion

Large Cap= greater than US$10 billion market capitalization

Mid Cap= companies between capitalization between $2 and $10 billion

Small Cap= Companies between $300 million and $2 billion

AAA has $6 billion and falls under Mid Cap

2. Current ratio=Current Assets/Current Liabilities=$50/$100=0.5

3. Price to Earnings ratio is forward looking.

Price to Earnings ratio=Share price/Expected EPS next year. In the calculation, we use earnings for the next year.

a. Payout propensity ratio=Dividends/Earnings=15/150=10%

b. Dividend yield=Dividends/Share price=15/300=5%

A. long term debt contribution=400/(1600+400)=400/2000=20%

Equity contribution=1600/2000=80%

Option b is correct

B. return on equity=Net Income/Total equity

earnings before taxes=EBIT-Interest expenses=140-50=90

Net income=Earnings before taxes*(1-tax rate)=90*(1-35%)=58.5

Return on equity=58.5/1600=3.66%

Option d is correct