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Week 2 Homework Assignment

The document contains a homework assignment with 5 questions. Question 1 asks to calculate days in receivables given financial information. Question 2 asks to determine which of two firms has a greater return on equity. Question 3 asks to calculate net income given return on equity and other financial ratios. Question 4 asks to determine the profit margin a firm must achieve given an internal growth rate and other information. Question 5 asks to calculate sustainable growth rate.

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Kasturi Mazumdar
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11 views

Week 2 Homework Assignment

The document contains a homework assignment with 5 questions. Question 1 asks to calculate days in receivables given financial information. Question 2 asks to determine which of two firms has a greater return on equity. Question 3 asks to calculate net income given return on equity and other financial ratios. Question 4 asks to determine the profit margin a firm must achieve given an internal growth rate and other information. Question 5 asks to calculate sustainable growth rate.

Uploaded by

Kasturi Mazumdar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Week 2 Homework Assignment

Name: Kasturi Mazumdar

Please complete the following questions. Show your work.

1. A company has net income of $196,500, a profit margin of 6.8%, and an accounts receivable
balance of $119,630. Assuming 65% of sales are on credit, what is the company’s days in receivables?
(2pts)

(Net Income) 196,500


Profit Margin= Sales= =2,889,705
Sales 0.068

Credit Sales= 65% of 2,889,705 =1,878,308.82

Credit Sales 1,878,308.82


Receivbles Turnover= = =15.70
Avg . Accounts Receivables 119,630

' 365 365


Day s Sales∈ Receivables= = =23.25 days
Receivables Turnover Ratio 15.70

2. Firm A and Firm B have debt-total assets ratios of 65 percent and 45 percent, respectively, and
returns on total assets of 5% and 7%, respectively. Which firm has a greater return on equity? (2pts)

Firm A:
Net Income Net Income
RoA= =0.05 Therefore, Total Assets=
Total Assets 0.05
Total Assets−Total Equity T . Equity
Total Debt Ratio= =1− =0.65 Therefore,
Total Assets T . Assets
T . Equity
=0.35
T . Assets
On substituting the value of Total Assets in the previous equation, we get:
T . Equity∗0.05 T . Equity 1
=0.35 =7 The reciprocal gives us RoE= =0.14=14 %
Net Income Net Income 7

Similarly, for Firm B:


Net Income Net Income
RoA= =0.07 Therefore, Total Assets=
Total Assets 0.07

Total Assets−Total Equity T . Equity


Total Debt Ratio= =1− =0.45 Therefore,
Total Assets T . Assets
T . Equity
=0.55
T . Assets
On substituting the value of Total Assets in the previous equation, we get:
T . Equity∗0.07 T . Equity
=0.55 =7.86 The reciprocal gives us
Net Income Net Income
1
RoE= =0.13=13 %
7.86

On comparing the RoE for both firms, Firm A has a greater Return on Equity.

3. Y3K, Inc. has sales of $6,183, total assets of $2,974, and a debt-to equity ratio of 0.57. If its return
on equity is 11%, what is its net income? (2pts)

T . Assets−T . Equity T . Assets


Debt −Equity Ratio= = −1=0.57
T . Equity T . Equity
T. Assets= 2,974 Therefore, T. Equity= 1,894.27
Net Income Net Income
Returnon Equity= = 0.11
Equity 1,894.27
Net Income= 208.37
4. A company wishes to maintain an internal growth rate of 7.1% and a dividend payout ratio of 25%
per year. The ratio of total assets to sales is constant at 0.85. What profit margin must the firm
achieve? (2pts)

0.071
InternalGrowth (ga )=RoA∗( 1− po ) ga = 0.071; po=0.25 RoA= =0.09=9 %
0.75
Net Income
RoA=
Assets
Multiplying and dividing Asset turnover by Sales, we get:
Net Income
∗Sales
Assets
RoA= =Profit Margin∗Asset Turnover=0.09
Sales
T . Assets
From the date, we know =0.85 The reciprocal of which is the A
Sales
1
sset Turnover= =1.18
0.85

RoA 0.09
Profit Margin= = =0.08=8 %
Asset Turnover 1.18
5. Gilmore, Inc., had equity of $145,000 at the beginning of the year. At the end of the year, the
company had total assets of $210,000. During the year, the company sold no new equity. Net income
for the year was $27,000 and dividend were $5,800. What is the sustainable growth rate for the
company? What is the sustainable growth rate of you use the formula ROE x b and beginning period
equity

Dividends Paid=Net Income∗Payout Rate Dividends=5,800, Net income= 27,000


5800
So, Payout Rate= =0.21=21 %
27000

Net Income 27,000


SustainableGrowth ( g e ) = ∗( 1− po ) = ∗0.79=0.15=15 %
T . Equity 145,000

Score

Question Score
1. /2
2. /2
3. /2
4. /2
5. /2
Total / 10

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