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
