Chapter 2: 14BP b (page 80)
Gates Appliances has a return-on-assets (investment) ratio of 8 percent.
b. If the firm had no debt, what would the return-on-equity ratio be?
Return on equity, when the firm has no debt: 8%
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Nova Electrics anticipates cash flow from operating activities of \(6 million in 20X1. It will need to spend \)1.2 million on capital investments to remain
competitive within the industry. Common stock dividends are projected at
\(.4 million and preferred stock dividends at \).55 million.
a. What is the firm’s projected free cash flow for the year 20X1?
b. What does the concept of free cash flow represent?
Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.
c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin
(return on sales)?
Explain why the statement of cash flows provides useful information that goes beyond income statement and balance sheet data.
Classify the following balance sheet items as current or noncurrent:
Retained earning | Bond payable |
Accounts payable | Accrued wages payable |
Prepaid expenses | Accounts receivable |
Plant and equipment | Capital in excess of par |
Inventory | Preferred stock |
Common stock | Marketable security |
Assume the following data for Cable Corporation and Multi-Media Inc.
Capable corporation | Muli-media inc | |
Net income | \(31,200 | \)140,000 |
Sales | 317,000 | 2,700,000 |
Total assets | 402,000 | 965,000 |
Total debts | 163,000 | 542,000 |
Stockholder’s equity | 239,000 | 423,000 |
Compute the return on stockholders’ equity for both firms using Ratio 3a. Which firm has the higher return?
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