Acc501 Assignment No. 1 solution
Friday, April 22, 2011 Edit This
Calculating the ROE using Du Pont model:
From Debt ratio:
Debt ratio = 0.55
Therefore, the company has $0.55 in debt for every $1 in assets. Therefore, there is $0.45 in equity (1-$0.55) for every $0.55 in debt.
Debt-equity ratio = Total debt / Total equity
= $0.55 / $0.45
= 1.2
Equity multiplier = 1 + Debt-equtiy ratio
= 1 + 1.2
= 2.2
ROE = (Net income / Sales ) * (Sales / Assets) * (Assets / Total equity)
= Profit margin * Total asset turnover ratio * Equity multiplier
But Net income is calculated as:
EBIT $1,000,000
(-) Interest $300,000
-----------------------------------
EBT $700,000
(-) Taxes 30% $210,000
---------------------------------
Net income $490,000
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ROE = ($490,000 / $15,000,000) * 2.0 * 2.2
= 0.03267 * 2.0 * 2.2
= 0.1437 or 14.37%
The company's ROE will increase by 11.87%
b) The company should take up the new plan as it is giving the higher ROE.
From Debt ratio:
Debt ratio = 0.55
Therefore, the company has $0.55 in debt for every $1 in assets. Therefore, there is $0.45 in equity (1-$0.55) for every $0.55 in debt.
Debt-equity ratio = Total debt / Total equity
= $0.55 / $0.45
= 1.2
Equity multiplier = 1 + Debt-equtiy ratio
= 1 + 1.2
= 2.2
ROE = (Net income / Sales ) * (Sales / Assets) * (Assets / Total equity)
= Profit margin * Total asset turnover ratio * Equity multiplier
But Net income is calculated as:
EBIT $1,000,000
(-) Interest $300,000
-----------------------------------
EBT $700,000
(-) Taxes 30% $210,000
---------------------------------
Net income $490,000
------------------------------
ROE = ($490,000 / $15,000,000) * 2.0 * 2.2
= 0.03267 * 2.0 * 2.2
= 0.1437 or 14.37%
The company's ROE will increase by 11.87%
b) The company should take up the new plan as it is giving the higher ROE.
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Sales = Rs. 3,000,000
Interest Charges = Rs. 65,000
Times Interest Earned (TIE) = EBIT / Interest Charges
Net Profit = Net Profit Margin * Sales
= 6% * Rs. 3,000,000
= Rs. 180,000
Earning Before Interest and Tax ( EBIT) = ( Rs. 180,000 / 65% ) + Rs. 65,000
EBIT = Rs. 276923 + Rs. 65, 000
= Rs. 341923
Times Interest Earned = EBIT / Interest Charges
= Rs. 341923 / Rs. 65, 000
= 5.06 times
Interest Charges = Rs. 65,000
Times Interest Earned (TIE) = EBIT / Interest Charges
Net Profit = Net Profit Margin * Sales
= 6% * Rs. 3,000,000
= Rs. 180,000
Earning Before Interest and Tax ( EBIT) = ( Rs. 180,000 / 65% ) + Rs. 65,000
EBIT = Rs. 276923 + Rs. 65, 000
= Rs. 341923
Times Interest Earned = EBIT / Interest Charges
= Rs. 341923 / Rs. 65, 000
= 5.06 times
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Question 2
Ans:
Sales = Rs. 3,000,000
Interest Charges = Rs. 65,000
Times Interest Earned (TIE) = EBIT / Interest Charges
Net Profit = Net Profit Margin * Sales
= 6% * Rs. 3,000,000
= Rs. 180,000
Earning Before Interest and Tax (EBIT) = (Rs. 180,000 / 65%) + Rs. 65,000
EBIT = Rs. 276923 + Rs. 65, 000
= Rs. 341923
Times Interest Earned = EBIT / Interest Charges
= Rs. 341923 / Rs. 65, 000
= 5.06 times
Ans:
Sales = Rs. 3,000,000
Interest Charges = Rs. 65,000
Times Interest Earned (TIE) = EBIT / Interest Charges
Net Profit = Net Profit Margin * Sales
= 6% * Rs. 3,000,000
= Rs. 180,000
Earning Before Interest and Tax (EBIT) = (Rs. 180,000 / 65%) + Rs. 65,000
EBIT = Rs. 276923 + Rs. 65, 000
= Rs. 341923
Times Interest Earned = EBIT / Interest Charges
= Rs. 341923 / Rs. 65, 000
= 5.06 times
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Altman Corporation has $1,000,000 of debt outstanding, and it pays an interest rate of 12 percent annually.
Altman s annual sales are $4 million, its federal-plus-state tax rate is 40 percent, and its net profit
margin on sales is 10 percent. If the company does not maintain a TIE ratio of at least 5 times, its
bank will refuse to renew the loan, and bankruptcy will result. What is Altman s TIE ratio?
e.
TIE = EBIT/Interest, so find EBIT and Interest.
Interest = $1,000,000(0.12) = $120,000.
Net income = $4,000,000(0.10) = $400,000.
Pre-tax income = $400,000/(1
T) = $400,000/0.6 = $666,667.
EBIT = $666,667 + $120,000 = $786,667.
TIE = $786,667/$120,000 = 6.56×.
Altman s annual sales are $4 million, its federal-plus-state tax rate is 40 percent, and its net profit
margin on sales is 10 percent. If the company does not maintain a TIE ratio of at least 5 times, its
bank will refuse to renew the loan, and bankruptcy will result. What is Altman s TIE ratio?
e.
TIE = EBIT/Interest, so find EBIT and Interest.
Interest = $1,000,000(0.12) = $120,000.
Net income = $4,000,000(0.10) = $400,000.
Pre-tax income = $400,000/(1
T) = $400,000/0.6 = $666,667.
EBIT = $666,667 + $120,000 = $786,667.
TIE = $786,667/$120,000 = 6.56×.
