Question

5. You are considering investing in Walters Wares, Inc. You have been able to locate the following information on the firm: total assets = $24 million, accounts receivable = $6 million, ACP = 20 days, net income = $2.86 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm? A. 32.5%
B. 38.8%
C. 41.7%
D. 44.5%

E. 48.6%

6. A corporation has a total asset turnover of 1.87 times, ROA of 14.8% and ROE of 18.5%. What is this firm's profit margin?

A. 9.9%
B. 9.2%
C. 8.5%
D. 7.9%
E. 6.9%

7. A corporation has a total asset turnover of 1.87 times, ROA of 14.8% and ROE of 18.5%. What is this firm's debt ratio? [Hint: equity multiplier = 1 / (1 – debt ratio)]

A. 18.5%
B. 20.0%
C. 21.2%
D. 21.9%

E. 28.1%

8. Which of the following statements is (are) correct?
(x) The maximum growth rate that can be achieved financing asset growth with new debt and retained
earnings is called the sustainable growth rate
(y) The maximum growth rate that can be achieved by financing asset growth with internal financing or
retained earnings is called the internal growth rate
(z) The internal growth rate is the growth rate that the firm can sustain if it finances growth using only internal
financing. The sustainable growth rate is the growth rate the firm can sustain using both debt and internal
financing such that the debt ratio remains constant.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

Answer to Question 5:

Total Assets = $24 million

Debt-to-Equity Ratio = 2.50 times

Total Equity = Weight of Equity * Total Assets
Total Equity = (1.00 / 3.50) * $24 million
Total Equity = $6.86 million

ROE = Net Income / Total Equity
ROE = $2.86 million / $6.86 million
ROE = 0.417 or 41.7%

Answer to Question 6:

ROA = Profit Margin * Total Asset Turnover
14.80% = Profit Margin * 1.87
Profit Margin = 7.9%

Answer to Question 7:

ROE = ROE * Equity Multiplier
18.5% = 14.8% * Equity Multiplier
Equity Multiplier = 1.25

Equity Multiplier = 1 / (1 - Debt Ratio)
1.25 = 1 / (1 - Debt Ratio)
1 - Debt Ratio = 0.8
Debt Ratio = 0.2 or 20.0%

Answer to Question 8:

Internal growth rate is the maximum growth rate a firm can achieve without any external financing.
Sustainable growth rate is the maximum growth rate a firm can sustain without additional debt or equity financing.

So, based on above, only statement (y) is correct.