Reference no: EM133002649

In the middle part of the recorded lecture, our shoe manufacturing company expanded its production and sales to 225 pairs by borrowing $2,000 and thereby increasing its assets accordingly.

For this question, assume the company "rearranges" its balance sheet - $9,000 in owners' equity and $3,000 in debt. In other words, besides borrowing $2,000 in order to expand, as in the lecture example, it borrows an additional $1,000 (at the same interest rate) in order to return funds to owners. This is known as recapitalization - replacing some equity with debt.

With this new balance sheet, recalculate profits and ROE on the 225 unit sales. Perform the DuPont Analysis, examining how each factor changed from the lecture case.

Problem 1: Coverage ratio measures a company's ability to service debt. It is the amount of money available to pay interest divided by the amount of interest that needs to be paid; i.e., the money coming down the waterfall just before it reaches the "financing cost cliff" divided by the financing cost on that cliff. Compare the coverage ratio in this question to the ratio in the lecture example of $10,000 equity & $2,000 debt.