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CHAPTER 3-8

# CHAPTER 3-8 - NI TA =.12 NI TA =.11 NI =.12(TA NI =.11(TA...

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NI / TA = .12 NI / TA = .11 NI = .12(TA) NI = .11(TA) Since ROE = NI / E, we can substitute the above equations into the ROE formula, which yields: ROE = .12(TA) / .65(TA) = .12 / .65 = 18.46% ROE = .11(TA) / .70 (TA) = .11 / .70 = 15.71% 23. This problem requires you to work backward through the income statement. First, recognize that Net income = (1 – t)EBT. Plugging in the numbers given and solving for EBT, we get: EBT = \$13,168 / (1 – 0.34) = \$19,951.52 Now, we can add interest to EBT to get EBIT as follows: EBIT = EBT + Interest paid = \$19,951.52 + 3,605 = \$23,556.52 To get EBITD (earnings before interest, taxes, and depreciation), the numerator in the cash coverage ratio, add depreciation to EBIT: EBITD = EBIT + Depreciation = \$23,556.52 + 2,382 = \$25,938.52 Now, simply plug the numbers into the cash coverage ratio and calculate: Cash coverage ratio = EBITD / Interest = \$25,938.52 / \$3,605 = 7.20 times 24. The only ratio given which includes cost of goods sold is the inventory turnover ratio, so it is the last ratio used. Since current liabilities is given, we start with the current ratio: Current ratio = 1.40 = CA / CL = CA / \$365,000 CA = \$511,000 Using the quick ratio, we solve for inventory: Quick ratio = 0.85 = (CA – Inventory) / CL = (\$511,000 – Inventory) / \$365,000
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