Week 2 Problem set

# Week 2 Problem set - ROA 8 Interest expense \$225,000...

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FIN 317- March 18, 2011 4-5 A company has an EPS of \$2.00, a cash flow per share of \$3.00,and a price/cash flow ratio of 8.0×. What is its P/E ratio? Price/Cash flow per share = 8 times Price/\$3.00 = 8 times Therefore PRICE= 8 x 3 = \$24.00 P/E ratio = Market value per share/Earnings per share = \$24.00/\$2.00 = 12 4-7 Ebersoll Mining has \$6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. The company is 50% equity financed. What is its net income? Total assets turnover = Sales/Total Assets = 3.2 times \$6 million/Total assets = 3.2 times Therefore, total assets = \$6 million/3.2 ==> \$1,875,000 Equity financing = \$1,875,000 x 50% ==> \$937,500 Net Income/Shareholder's equity = 12% Net income/\$937,500 = 12% Therefore, net income =937,500x 12% ==> \$112,500 4-8 BASIC EARNING POWER Duval Manufacturing recently reported the following information: Net income \$600,000

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Unformatted text preview: ROA 8% Interest expense \$225,000 Duval’s tax rate is 35%. What is its basic earning power (BEP)? Solution: Computation of the Basic Earning power Formula for BEP Basic Earning Power (BEP) = EBIT/Total Assets First need to find the Total Asset ROA = Net Income/Total Assets Total Assets = Net Income/ROA = 600,000/0.08 = \$7,500,000 Net Income = EBIT - Interest - Tax = (1-T)(EBIT – Interest EBIT = Net Income/(1-T) + Interest = 600,000/0.65 +225,000 =\$1,148,000 BEP = 1148000/7500000 = 0.153 = 15.3% Hence the Basic Earning power is 15.3% 4-10Assume the following relationships for the Brauer Corp.: Sales total assets 1.5× Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Brauer’s profit margin and debt ratio. Profit margin = ROA*total assets/sales = 3%/1.5 = 2% Equity/ assets = ROA/ROE = 3%/5% = 60% Debt ratio = 1-60% = 40%...
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Week 2 Problem set - ROA 8 Interest expense \$225,000...

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