A firm had sales of $5,000,000 and incurred a cost of goods sold equal to $4,500

Question

A firm had sales of $5,000,000 and incurred a cost of goods sold equal to $4,500,000. The firm’s operating expenses were $130,000, and its increases in retained earnings was $40,000 for the year. There are currently 100,000 common-stock shares outstanding, and the firm pays a $1.485 dividend per share. The firm has $1,000,000 in interest-bearing debt on which it pays 8% interest. Assuming the firm’s earnings are taxed at 35% construct the firms’ income statement Calculate the firm’s operating profit margin and net profit margin. Compute the times interest earned ratio. What does this ration tell you about its ability to pay its interest expense? What is the firm’s return on equity?

Explanation / Answer

Construction of firm's Income statement -

operating profir margin = EBIT / Sales

= 370000/5000000

= 7.40%

Net profit margin = 188500/5000000

= 3.77%

computation of times interest earned ratio -

Times interest earned ratio = EBIT (Earnings berfore interest & tax)/ Interest expense

= 370000/80000

= 4.625

Firm can easily meet out its interest expense.

Calculation of Return on equity -

Return on equity = Net income / Shareholders equity

= 188500/1000000

= 18.85%

assume face value of equity shares = $10/share

pleases check with your answer and let me know.

Particulars $ Remarks sales 5000000 Given less COGS 4500000 Given Gross profit 500000 less operating expense 130000 Given EBIT 370000 less Interest expense (1000000*8%) 80000 EBT 290000 less Tax @ 35% on 290000 101500 EAT 188500 less dividend (1.485*100000) 148500 Retained earnings 40000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.