fm22 9 - 22-13 a. Return on equity may be computed as...

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Answers and Solutions: 22 - 9 22-13 a. Return on equity may be computed as follows: Tight Moderate Relaxed Current assets (% of sales × Sales) $ 900,000 $1,000,000 $1,200,000 Fixed assets 1,000,000 1,000,000 1,000,000 Total assets $1,900,000 $2,000,000 $2,200,000 Debt (60% of assets) $1,140,000 $1,200,000 $1,320,000 Equity 760,000 800,000 880,000 Total liab./equity $1,900,000 $2,000,000 $2,200,000 EBIT (12% × $2 million) $ 240,000 $ 240,000 $ 240,000 Interest (8%) 91,200 96,000 105,600 Earnings before taxes $ 148,800 $ 144,000 $ 134,400 Taxes (40%) 59,520 57,600 53,760 Net income $ 89,280 $ 86,400 $ 80,640 Return on equity 11.75% 10.80% 9.16% b. No, this assumption would probably not be valid in a real world situation. A firm’s current asset policies, particularly with regard to accounts receivable, such as discounts, collection period, and collection policy, may have a significant effect on sales. The exact nature of this function may be difficult to quantify, however, and determining an “optimal” current asset level may not be possible in actuality. c.
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