Now to find total interest, you have to find the interest rate and multiply it by the total loan. The business requires $565,500 of assets, so let us set our baseline at that. Multiply that by .075 (the interest rate) and one gets 42,412.5 total interest payable (in one year). Divide EBIT by total interest payable, and you get 2.3. Now the company needs to increase the TIE by decreasing the interest earned.
Simply set the total interest payable (the only changing variable) to x to get 98,500/x = 4.0. Divide by zero, divide by four, and you get $24,625 total payable interest. At 7.5%, the total loan would be $328,333. The debt ratio would then be $328,333 divided by total assets, 565,000. Which results in a .5 debt ratio.
3) LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?
ROE is simply net income divided by the shareholder's equity. The net income is $24,655. Shareholder's equity represents the amount of equity shareholder's hold in the company. Since all capital is raised on common equity capital, then all the capital is raised by shareholders. That also means that all assets bought by the company...
So divide 24,655 by 312,900 and you'll arrive at the ROE, which is around 7.8%. Assuming that equity is constant, in order to get an ROE of 15, you would need to change the net income to $46,935. That's the profit margin you would need to maintain to get a 15% ROE.
4) Muscarella Inc. has the following balance sheet and income statement data:
Cash
$14,000
Accounts payable
$42,000
Receivables
70,000
Other current liabilities
28,000
Inventories
210,000
Total CL
$70,000
Total CA
$294,000
Long-term debt
70,000
Net fixed assets
126,000
Common equity
280,000
Total assets
$420,000
Total liab. And equity
$420,000
Sales
$280,000
Net income
$21,000
The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?
The…
