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(TCO D) These are selected ratios for Widget Corporation and Tools Inc. Use this information answer the following questions.
WidgetCorp. Tools, Inc. Total asset turnover 2.5 2.0 Inventory turnover 4.6 4.0 Accounts receivable turnover 12.0 12.0 Fixed assets turnover 1.8 2.0 Net profit margin 4.5% 2.9% Assets/equity 2.10 3.3 EBIT/revenues 9.9% 8.6% Gross margin 21.1% 19.8% Income tax rate 35% 35%
Calculate Return on Equity and identify the company with the higher ROE.
We know from equity valuation models that, all other things equal, the company with the higher ROE will have a higher sustainable growth rate and thus have a higher intrinsic value.
Why are all other things not likely to be equal when comparing the ROE of these two companies?
Hint: look at components of ROE. Which company has better operating performance (ignoring capital structure)?
Cost of debt using both methods Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. Find the net proceeds from sale of the bond, Nd. Calculate the before-tax and after-tax costs of debt.
What is the all-in cost of a 5-year loan? What are its main components?
Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. What is the expected value of the cash flow? The value you compute will apply to each of the five years. What is the ex..
Find the following values for a lump sum assuming annual compounding: What is the effective annual rate (EAR) if the stated rate is 8 percent and compounding occurs semiannually? Quarterly?
If Axel reports net income of $2,400,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?
The firm carries an average inventory of $4,800 and has an average accounts payable balance of $4,400. What is the inventory period 12.39 days
A US investor has $10 million to invest in interest-bearing securities for one year. He can invest in US dollars at 2 ¾ % p.a. or in pounds sterling at 4 ½ % p.a. The current spot rate (American terms) is 1.8172 dollars per pound. At what spot rate o..
Caballos, Inc., has a debt to capital ratio of 31%, a beta of 1.88 and a pre-tax cost of debt of 7.6%. Estimate the Value of the Firm.
Assuming Okun's law, what is the output gap in 2020? - If output grows 5 percent from 2020 to 2021, what is the unemployment rate in 2021?
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The margin requirement on an IBM stock purchase is 15%. How much Anderson invested?
If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. b. The req..
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