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1) If a firm's net profit margin is 11
1) If a firm's net profit margin is 11.2%, asset turnover is 1.8, and the debt ratio is 0.7, what is the firm's return on equity (ROE)?
2) a company uses a residual dividend policy. a debt equity ratio of 1.50 is considered optimal. earnings for the period just ended were 2300 and a dividend of 1200 was paid. what were total capital outlays?
3) Marino Company has provided the following information:
Net sales, $814,000
Net income, $37,000
Average total assets, $370,000
What is Marino's return on assets ?
Expert Solution
1) Computation of the return on equity (ROE):-
Net profit margin = Net income / Sales
Net income = 11.2% * Sales
Asset turnover = Sales / Assets
1.8 = Sales / Assets
Sales = 1.8 * Assets
Debt ratio = Debt / Assets
0.7 = Debt / Assets
Debt = 0.7 * Assets
Assets = Debt + Equity
Equity = Assets - (0.7 * Assets)
= 0.3 * Assets
ROE = Net income / Equity
= (11.2% * Sales) / (0.3 * Assets)
= (11.2% * 1.8 * Assets) / (0.3 * Assets)
= 67.2%
2) Computation of the total capital outlay:-
Equity portion of capital outlays = Total earnings - Dividends
= 2300 - 1200
= 1100
New debt = Equity portion * Debt equity ratio
= 1100 * 1.50
= 1650
Total capital outlay = Equity portion of capital outlays + New debt
= 1100 + 1650
= 2750
3) Computation of the Marino's return on assets:-
Return on assets (ROA) = Net income / Average total assets
= $37,000 / $370,000
= 10%
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