Common sized finacial statements current ratio 40% Total debt 40% net income 16% Total assets $2000 sales $1500 Total asset turnover ratio .75 No prefered shares The companys after tax return on common equity is a. 15% b. 16% c. 20% d. 25% My problem is that ROE= net income /equity or you can use duport analysis but these two methods are giving different answers 20 and 25% respectively. I am not sure how to decide which method to use. Am I missing something here? 2. three yrs ago an investor purchased a $1000 face 4.55 semiannual coupon bond with seven yrs to matuarity to prices to yield 6.5% for $888.94. The reinvestment income that must be generated over the life of a bond to for him to realise 6.5% yield is: a. 72 b. 76 c. 80 d. 83

2nd one is b. I don’t know the answer to first.

Pepp show the working i can figure out how to do it.

fv of an annuity of 22.5, n=14 r=6.5/2 take out the coupon for 14x45 from the fv.

Can you show the working step by step to get the answer am not very clear PePP

Pepp and I had the discussion before. easier way to understand problem 2: 888.94 is what you paid for the bond. If it earned 6.5% per annum for the rest of its life, what would it become? 888.94 * 1.0325^14 = 1391.02 What do you actually get by investing in the bond? 1000 + 22.5 * 14 = 1315 (Coupon payments for 14 periods + face value) This bond was earning less than 6.5% per annum. Therefore, How much should you reinvest? 1391.02 - 1315 = 76$ Hope this helps CP

answer for 1 is 20% NI = .16 * 1500 = 240 CE = (1-.4) * 2000 = 1200 NI / CE = 20% Going by the Dupont Route: NI / CE = NI / NS * NS / TA * TA / CE = .16 * .75 * 2000 / 1200 = 20% still. CP

cpk123 Wrote: ------------------------------------------------------- > > 1000 + 22.5 * 14 = 1315 (Coupon payments for 14 > periods + face value) > > > CP I think the answer is A, the coupon is 4.55% so semi annual interest payment should be 22.75 = 1000*(4.55%/2) making the total cash flow return 1000 + 22.75*14 = 1318.50 1391.02 - 1318.50 = ~$72.50

That is right. Sorry went with the numbers in yesterday’s problem. CP

CP, you are a great teacher thank you. second one now makes sense i must have punched wrong figures for the first one when i did dupont. thank you.

Char-Lee Wrote: ------------------------------------------------------- > cpk123 Wrote: > -------------------------------------------------- > ----- > > > > > 1000 + 22.5 * 14 = 1315 (Coupon payments for 14 > > periods + face value) > > > > > > > CP > > > > I think the answer is A, the coupon is 4.55% so > semi annual interest payment should be 22.75 = > 1000*(4.55%/2) making the total cash flow return > 1000 + 22.75*14 = 1318.50 > > > 1391.02 - 1318.50 = ~$72.50 I get the answer as 76 STILL.