Question Details

By how much would the change in the capital structure improve the ROE 



1.	Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%.  Now suppose the new CFO convinces the president to increase the debt ratio to 48%.  Sales and total assets will not be affected, but interest expenses would increase.  However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged.  By how much would the change in the capital structure improve the ROE ?

a.	2.13%
b.	2.35%
c.	2.58%
d.	2.84%
e.	3.12%
	

2.	Last year Kruse Corp had $305,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%.  The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500.  Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt).  By how much would the reduction in assets improve the ROE?

a.	2.85%
b.	3.00%
c.	3.16%
d.	3.31%
e.	3.48%
	(The following information applies to Problems 3 through 5.)
The balance sheet and income statement shown below are for Koski Inc.  Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)
Assets	   2007
Cash and securities	$ 2,500
Accounts receivable	11,500
Inventories	 16,000
Total current assets	$30,000
Net plant and equipment	$20,000
Total assets	$50,000
Liabilities and Equity
Accounts payable	$ 9,500
Notes payable	7,000
Accruals	  5,500
Total current liabilities	$22,000
Long-term bonds	$15,000
Total debt	$37,000
Common stock	$ 2,000
Retained earnings	 11,000
Total common equity	$13,000
Total liabilities and equity	$50,000

Income Statement (Millions of $)	   2007
Net sales	$87,500
Operating costs except depreciation 	81,813
Depreciation 	  1,531
Earnings bef interest and taxes (EBIT)	$ 4,156
Less interest 	  1,375
Earnings before taxes (EBT)	$ 2,781
Taxes		    973
Net income	$ 1,808

Other data:
Shares outstanding (millions)	500.00
Common dividends	$632.73
Int rate on notes payable & L-T bonds	6.25%
Federal plus state income tax rate	35%
Year-end stock price	$43.39

3.	What is the firm's days sales outstanding?  Assume a 365-day year for this calculation.

a.	39.07
b.	41.13
c.	43.29
d.	45.57
e.	47.97
	
4.	What is the firm's book value per share?

a.	$22.29
b.	$23.47
c.	$24.70
d.	$26.00
e.	$27.30
	

5.	What is the firm's equity multiplier?

a.	3.85
b.	4.04
c.	4.24
d.	4.45
e.	4.68




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