Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 3, Problem 5QP
Calculating Leverage Ratios [LO2] Levine, Inc., has a total debt ratio of .53. What is its debt–equity ratio? What is its equity multiplier?
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Calculating Profi tability Ratios [LO2] Wakers, Inc., has sales of $29 million,total assets of $17.5 million, and total debt of $6.3 million. If the profi t marginis 8 percent, what is net income? What is ROA? What is ROE?
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(DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of percent. What is the firm's equity multiplier? How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain.
What is the firm's equity multiplier?
The equity multiplier is given by: equity multiplier = 1/1-DEBT RATIO
The equity multiplier is___. (Round to two decimal places.)
How is the equity multiplier related to the firm's use of debt financing (i.e., if the firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain. (Select the best choice below.)
A.
If the company decreases its debt financing it will increase its debt ratio, therefore it will increase its equity multiplier.
B.
If the company increases its debt financing it will increase its debt ratio, therefore it will…
5:33
What is the firm's equity multiplier?
The equity multiplier is given by:
1
1 - Debt Ratio
(DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio of 78 percent.
What is the firm's equity multiplier? How is the equity multiplier related to the firm's use of debt financing (i.e., if the
firm increased its use of debt financing would this increase or decrease its equity multiplier)? Explain.
Equity Multiplier =
The equity multiplier is
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(Round to two decimal places.)
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Chapter 3 Solutions
Fundamentals of Corporate Finance
Ch. 3.1 - Prob. 3.1ACQCh. 3.1 - Prob. 3.1BCQCh. 3.2 - Prob. 3.2ACQCh. 3.2 - Name two types of standardized statements and...Ch. 3.3 - What are the five groups of ratios? Give two or...Ch. 3.3 - Given the total debt ratio, what other two ratios...Ch. 3.3 - Turnover ratios all have one of two figures as the...Ch. 3.3 - Profitability ratios all have the same figure in...Ch. 3.4 - Return on assets, or ROA, can be expressed as the...Ch. 3.4 - Return on equity, or ROE, can be expressed as the...
Ch. 3.5 - Prob. 3.5ACQCh. 3.5 - Prob. 3.5BCQCh. 3.5 - Prob. 3.5CCQCh. 3.5 - Prob. 3.5DCQCh. 3 - Prob. 3.1CTFCh. 3 - Prob. 3.2CTFCh. 3 - What is the correct formula for computing the...Ch. 3 - Prob. 3.5CTFCh. 3 - Current Ratio [LO2] What effect would the...Ch. 3 - Current Ratio and Quick Ratio [LO2] In recent...Ch. 3 - Prob. 3CRCTCh. 3 - Prob. 4CRCTCh. 3 - Prob. 5CRCTCh. 3 - Prob. 6CRCTCh. 3 - Prob. 7CRCTCh. 3 - Prob. 8CRCTCh. 3 - Prob. 9CRCTCh. 3 - Industry-Specific Ratios [LO2] There are many ways...Ch. 3 - Prob. 11CRCTCh. 3 - Prob. 12CRCTCh. 3 - Calculating Liquidity Ratios [LO2] SDJ, Inc., has...Ch. 3 - Calculating Profitability Ratios [LO2] Shelton,...Ch. 3 - Calculating the Average Collection Period [LO2]...Ch. 3 - Calculating Inventory Turnover [LO2] The Green...Ch. 3 - Calculating Leverage Ratios [LO2] Levine, Inc.,...Ch. 3 - Calculating Market Value Ratios [LO2] Makers Corp....Ch. 3 - DuPont Identity [LO4] If Roten Rooters, Inc., has...Ch. 3 - DuPont Identity [LO4] Zombie Corp. has a profit...Ch. 3 - Prob. 9QPCh. 3 - Prob. 10QPCh. 3 - Prob. 11QPCh. 3 - Equity Multiplier and Return on Equity [LO3] SME...Ch. 3 - Just Dew It Corporation reports the following...Ch. 3 - Prob. 14QPCh. 3 - Prob. 15QPCh. 3 - Prob. 16QPCh. 3 - Calculating Financial Ratios [LO2] Based on the...Ch. 3 - Using the DuPont Identity [LO3] Y3K, Inc., has...Ch. 3 - Days Sales in Receivables [LO2] A company has net...Ch. 3 - Ratios and Fixed Assets [LO2] The Caughlin Company...Ch. 3 - Profit Margin [LO4] In response to complaints...Ch. 3 - Return on Equity [LO2] Firm A and Firm B have...Ch. 3 - Calculating the Cash Coverage Ratio [LO2] Ugh...Ch. 3 - Cost of Goods Sold [LO2] W B Corp. has current...Ch. 3 - Prob. 25QPCh. 3 - Some recent financial statements for Smolira Golf...Ch. 3 - DuPont Identity [LO3] Construct the DuPont...Ch. 3 - Prob. 28QPCh. 3 - Market Value Ratios [LO2] Smolira Golf Corp. has...Ch. 3 - Tobins Q [LO2] What is Tobins Q for Smolira Golf?...Ch. 3 - Using the financial statements provided for SS...Ch. 3 - Mark and Todd agree that a ratio analysis can...Ch. 3 - Compare the performance of SS Air to the industry....
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- May I ask for a solution and explanation to the problem for a better understanding. Thank you! 9. Using carrot corp., what is the debt-to-equity ratio? a. 30.77 : 1 b. 31.60 : 1 c. 30.50 : 1 d. 31.20 : 1arrow_forwardQueen, Inc., has a total debt ratio of .22. a. What is its debt-equity ratio? b. What is its equity multiplier?arrow_forwardFrom the Google Finance site, look at Hewlett Packards profitability ratios (as measured by its profit margin, ROA, and ROE). How do these ratios compare with those of its peers?arrow_forward
- What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?arrow_forwardGive typing answer with explanation and conclusion If the company were to borrow more (or less), how would that impact the cost of debt and the WACC? Provide a specific assumed example. Weight of Equity 76.10% Weight of Debt 23.90% Cost of Equity 6.98% Cost of Debt 2.55% Tax Rate WACC 5.92%arrow_forward3. ABC Corp.’s equity multiplier is 1.25. What is its debt ratio? 4.Easy Corp.’s return on assets measure is 0.20 (20%. Its return on equity measure is 0.25 (25%). What is the firm’s equity multiplier?arrow_forward
- D3) When firms increase their debt-equity ratio, we find: Group of answer choices The ROE always falls. The EPS always rises. Swings in return of equity (ROE) are smaller. Swings in earnings per share (EPS) are magnified.arrow_forwardCalculate Debt to Equity Ratio? Is it possible to have a (%) over 100% for debt to equity?arrow_forward45. Which of the following is an example of a capital market instrument? a. Commercial Paper. b. Treasury bills. c. Preferred stock. d. Banker’s acceptances. 46. Which of the following ratios will increase as a firm uses more financial leverage? a. The debt-to-equity ratio b. The inventory turnover c. The time-interest-earned ratio 47 You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5 percent compounded annually, how long will you have to wait to buy the stereo? a. 18.78 years. b. 14.58 years. c. 8.42 years. d. 6.58 years.arrow_forward
- [EXCEL] Finance balance sheet: KneeMan Markup Company has total debt obligations with book and market values equal to $30 million and $28 million, respectively. It also has total equity with book and market values equal to $20 million and $70 million, respectively. If you were going to buy all of the assets of KneeMan Markup today, how much should you be willing to pay? please use excelarrow_forward6. Assumptions of the Modigliani and Miller proposition Aa Aa Modern capital structure theory, constructed by Modigliani and Miller, began in 1958 and provided a justification for a corporation's use of more and more financial leverage under certain assumptions. CEOS and CFOS were encouraged to accept M&M's theory and put it into practice, especially when the company's spending is high and the risk of servicing its debt is low. As capital markets have evolved, it is critical to understand the context and assumptions under which this model was created. Review the situation and answer the questions that follow: An analyst has graphed the relationship between the expected return on a firm's capital and its debt-equity (D/E) ratio. Her graph follows: RATES OF RETURN (Percent) 20 18 16 "Equity 14 12 rAssets 10 8. rDebt 6 2 0.0 0.5 1.0 1.5 2.0 DEBT-EQUITY D/E RATIOarrow_forwardRefer to Exhibit 4.1 What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.arrow_forward
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