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ICE 303 Chapter 21 Suggested Answers to Selected End of Chap

# ICE 303 Chapter 21 Suggested Answers to Selected End of...

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Lecture 4 Answers to problems 21-1. assets-to-equity = total assets ÷ total equity, debt ratio = 1 – 1/(assets-to-equity ratio). This is the same manner in which the equity multiplier is related to the debt ratio. ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 G G E d m S E d m S E A d m S A E A d m g - = ÷ - - ÷ - = - - - = 1 1 1 1 1 1 * 21-3. ( 29 ( 29 ( 29 ( 29 % 33 . 33 % 25 1 % 25 1 1 1 1 1 * = - = - - - = - - - = d ROE d ROE E A d m S A E A d m g Note: ROE = S*(m) ÷ E and that (1 – d) equals one under the initial assumptions of the problem. Find “d” from 25% = 25%*(1 – d) ÷ [1 – 25%*(1 – d)] d = 1 – 25% ÷ [25% + (25%*25%)] = 20% Retention ratio = (1 – d) = (1 – 20%) = 80% 21-11. 2005 Sales 35000000 Cost of Goods Sold 22750000 Gross Profit 12250000 Operating Expenses 3500000 Depreciation 5200000 Pretax profit 3550000 Taxes (35%) 1242500 Net income 2307500 Retained earnings = 80% × net income = \$1,846,000 Balance sheet Cash 3000000 Accounts Receivable 2975000 Inventory 2275000 Net Fixed Assets 25800000 Total Assets 34050000 Accounts Payable 3150000 Equity 21846000 24996000

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In the income statement, we arrive at the depreciation figure as follows. First, existing assets are depreciated on a straight-line basis, and none of them will be fully depreciated during 2005. This implies that the 2005 depreciation charge on existing assets will be the same as the 2004 charge, \$5 million. Next, we assume that the firm takes a full year (1/5 of \$1 million) of depreciation on its new investment in fixed assets for the year, or \$200,000. This brings total 2005 depreciation charges to \$5.2 million. On the balance sheet, net fixed assets equals \$30 million from last year, plus \$1 million
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ICE 303 Chapter 21 Suggested Answers to Selected End of...

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