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Pages:
3 pages/≈825 words
Sources:
3 Sources
Level:
MLA
Subject:
Accounting, Finance, SPSS
Type:
Math Problem
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 15.8
Topic:

The Use of Ratio Analysis and The Clientele Effect (Math Problem Sample)

Instructions:

EXCERPT OF THE Math problem
Arrow technology, INC (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum. tHE QUESTION REQUIRED THE USE OF RATIO ANALYSIS. AMONG THE RATIOS USED INCLUDE profitability ratio such as EBIT, RETURN ON EQUITY ET AL..Explain ation on what is meant by the clientele effect

source..
Content:


(Name)
(Instructors’ name)
(Course)
(Date)
Section 13-10: Question six
Debt ratio (Debit/total asset)


0%

25%

50%

Total assets

10,000,000

10,000,000

10,000,000

Debt (@ 12% interest)

0

2,500,000

5,000,000

Equity

10,000,000

7,500,000

5,000,000

Total liability and equity

10,000,000

10,000,000

10,000,000

Expected operating income (EBIT)

2,500,000

2,500,000

2,500,000

Less interest (@ 12%)

0

(300,000)

(600,000)

Earnings before tax

2,500,000

2,200,000

1,900,000

Less: income tax @ 40%

(1,000,000)

(880,000)

(760,000)

Earning after tax

1,500,000

1,320,000

1,140,000

Return on equity

15%

17.6%

22.8%

Effects of 20% decrease in EBIT to $2,000,000

Expected operating income (EBIT)

2,000,000

2,000,000

2,000,000

Less: interest (@ 12%)

0

(300,000)

(600,000)

Earnings before tax

2,000,000

1,700,000

1,400,000

Less: income tax @ 40%

(800,000)

(680,000)

(560,000)

Earning after tax

1,200,000

1,020,000

840,000

Return on equity

12%

13.6%

16.8%

Effects of 20% increase in EBIT to $3,000,000

Expected operating income (EBIT)

3,000.000

3,000,000

3,000,000

Less: interest (@ 12%)

0

(300,000)

(600,000)

Earnings before tax

3,000,000

2,700,000

2,400,000

Less: income tax @ 40%

...
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