Solutions_to_Ch._4_HW_Problems_-_Financial_Statement_Analysis

# Solutions_to_Ch._4_HW_Problems_-_Financial_Statement_Analysis

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Solutions to Ch. 4 Homework Problems Financial Statement Analysis 4-16 Known data: TA = \$1,000,000; Int. rate = 8%; T = 40%; BEP = 0.2 = EBIT/Total assets, so EBIT = 0.2(\$1,000,000) = \$200,000; D/A = 0.5 = 50%, so Equity = \$500,000. D/A = 0% D/A = 50% EBIT \$200,000 \$200,000 Interest 40,000 * EBT \$200,000 \$160,000 Tax (40%) 80,000 64,000 NI \$120,000 \$ 96,000 ROE = Equity NI = \$1,000,000 \$120,000 = 12% \$500,000 \$96,000 = 19.2% Difference in ROE = 19.2% 12.0% = 7.2%. *If D/A = 50%, then half of the assets are financed by debt, so Debt = \$500,000. At an 8% interest rate, INT = \$40,000. 4-17 Statement a is correct. Refer to the solution setup for Problem 4-16 and think about it this way: (1) Adding assets will not affect common equity if the assets are financed with debt. (2) Adding assets will cause expected EBIT to increase by the amount EBIT = BEP(added assets). (3) Interest expense will increase by the amount Int. rate(added assets). (4) Pre-tax income will rise by the amount (added assets)(BEP Int. rate). Assuming BEP > Int. rate, if pre-tax income increases so will net income. (5) If expected net income increases but common equity is held constant, then the expected ROE will also increase. Note that if Int. rate > BEP, then adding assets financed by debt would lower net income and thus the ROE. Therefore, Statement a is trueif assets financed by debt are added, and if the expected BEP on those assets exceeds the interest rate on debt, then the firms ROE will increase. Statements b, c, and d are false, because the BEP ratio uses EBIT, which is calculated before the effects of taxes or interest charges are felt. Of course, Statement e is also false. 4-18 TA = \$5,000,000,000; T = 40%; EBIT/TA = 10%; ROA = 5%; TIE ? . 000 , 000 , 500 \$ EBIT 10 . ,000 \$5,000,000 EBIT = = . 000 , 000 , 250 \$ NI 05 . ,000 \$5,000,000 NI = = Now use the income statement format to determine interest so you can calculate the firms TIE ratio....
View Full Document

## This note was uploaded on 04/05/2009 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.

### Page1 / 6

Solutions_to_Ch._4_HW_Problems_-_Financial_Statement_Analysis

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online