The Use of Ratio Analysis and The Clientele Effect (Math Problem Sample)
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
(Name)
(Instructors’ name)
(Course)
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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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