nASSIGNEMENT NO 3

ELINA ALI

ROLL NO M-17983

Assignement no:1

The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its

annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%. What is its TIE

ratio?

Net profit margin = Profit after tax = 2,000,000 x.05 = 100,000

then Profit before tax = X
 
Here X = (1-t) of X = 70 percent of X = 100,000
therefore X = 100,000/.70 = 142857
 
Profit before tax = 142857
Add interest = 50,000 (500,000 x10 percent)
EBIT = 192857
 
TIE = EBIT/Interest = 192857/50000 = 3.86 times
Question#2

Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating
plan that calls for a total debt ratio of 60%, which will result in annual interest charges of $300,000.
Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it expects to have a total
assets
turnover ratio of 2.0. Under these conditions, the tax rate will be 34%. If the changes are made, what
will
be the company’s return on equity?
Asset Turnover Ratio (ATR) = Net Sales / Total Assets     ------>(1)
Given Asset Turnover Ratio =2
=> 2 = 10,000,000/ Total Assets      (from equation 1)
=>Total Assets = 5,000,000         ------>(2)
Now ROE is given by ROE = Net Income / Equity
Net Income = (EBIT - Interest Charges) *(1-tax rate)
Net Income = (1,000,000 -300,000) *(1-34%)
Net Income = $462,000               -------->(3)
Equity = Total Assets *(1-debt ratio)  

quity = 5,000,000*(1-0.6) = $2,000,000    -------->(4)

From equation 3 and 4
ROE = Net Income / Equity = 462,000/2,000,000 =0.231
QUESTION NO :3
Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current
liabilities, $3
billion in long-term debt, and $6 billion in common equity. It has 800 million shares of
common stock
outstanding, and its stock price is $32 per share. What is Jaster’s market/book ratio?

BOOK VALUE OF EQUITY = 6 BILLION = 6000 MILLION

MARKET VALUE OF EQUITY = NO OF SHARES X SHARE PRICE = 800 MILLION

SHARES X 32 PER SHARE

MARKET VALUE OF EQUITY = 25600 MILLION

MARKET TO BOOK RATIO = MARKET VALUE OF EQUITY/BOOK VALUE OF EQUITY

MARKET TO BOOK RATIO = 25600//6000 = 4.27 (ROUNDED TO 2 DECIMALS)

QUESTION NO:4

A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of
8.0×.

What is its P/E ratio?

Answer.

Cash flow per share=3eps

Price/cash flow=8

Price/3eps=8

Price/earning=24

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