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2. The Tassel Corporation's common stock currently is selling at $50 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 10 per cent, and a debt ratio of 50 per cent, what is its return on total assets (ROA)?
3. Assume that you will receive $3,000 a year in Years 1 through 5, $2,000 a year in Years 6 through 8, and $3,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 10 per cent rate of return, what is the present value of these cash flows?
Expert Solution
The computation of the return on assets is shown below:
As we know that
Return on equity = Return on assets * equity ratio
So, the return on assets is
= Return on equity / equity ratio
where
Return on equity is 10%
And, the equity ratio is
= 1 - debt ratio
= 1 - 0.50
= 0.50
SO, the return on assets is
= 0.10 / 0.50
= 20%
Hence, the return on assets is 20%
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