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kakasveta [241]
2 years ago
9

7. DuPont Identity. X Corp. has net income of $20 million, Sales of $100 million, asset turnover of .6, and debt-equity ratio of

40%. a. What is its return on equity? b. If X increases its debt-equity ratio to 60%, what happens to its return on equity?
Business
1 answer:
goldfiish [28.3K]2 years ago
7 0

Answer:

Explanation:

Net Income = 20m

Sales = 100m

Debt-equity ration = 40%

Asset turnover = 0.60

A)

Profit Margin = Net Income / Sales  = $20 million / $100 million  = 20%

Equity Multiplier = 1 + Debt-Equity Ratio  = 1 + 0.40  = 1.40

Return on Equity = Profit Margin * Asset Turnover * Equity Multiplier               = 20% * 0.60 * 1.40  = 16.80%

B)

Debt-equity ratio = 60%

Equity Multiplier = 1 + Debt-Equity Ratio  = 1 + 0.60  = 1.60

Return on Equity = Profit Margin * Asset Turnover * Equity Multiplier  = 20% * 0.60 * 1.60 = 19.20%

As calculations provide, if debt-equity ratio increases to 60%, Return on equity will increase by 2.40% (19.20% - 16.80%)

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1 year ago
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2 years ago
In words, what does it mean when an economic consultant states:" kevin's income elasticity of red wine is equal to 6?
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2 years ago
A product ________ is a group of products linked through usage, customer profile, price points, and distribution channels.
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6 0
1 year ago
In doing a five-year analysis of future dividends, the Dawson Corporation is considering the following two plans. The values rep
Semmy [17]

Answer:

a. Total Dividends:

Plan A = $10.50

Plan B = $69.10

b-1. We have:

Present value of future dividends of Plan A = $8.29

Present value of future dividends of Plan B = $59.63

b-2. Plan B will provide the higher present value for the future dividends.

Explanation:

a. How much in total dividends per share will be paid under each plan over five years? (Do not round intermediate calculations and round your answers to 2 decimal places.)

Total Dividends per share of Plan A = $1.90 + $1.90 + $1.90 + $2.40 + $2.40 = $10.50

Total Dividends per share of Plan B = $60 + $2.30 + 0.20 + $5.00 + $1.60 = $69.10

b-1. Compute the present value of future dividends. (Do not round intermediate calculations and round your answers to 2 decimal places.)

The present value of each year dividend per share can be calculated using the following present value formula:

Present value per share for a year = Dividend per share for the year / (1 + r)^n .................. (1)

Where;

r = discount rate of each plan

n = the year being considered

Equation (1) is therefore used to calculate the present value of future dividends of each plan by adding the present values of all the years as follows:

Present value of future dividends of Plan A = ($1.90 / (1 + 8%)^1) + ($1.90 / (1 + 8%)^2) + ($1.90 / (1 + 8%)^3) + ($2.40 / (1 + 8%)^4) + ($2.40 / (1 + 8%)^5) = $8.29

Present value of future dividends of Plan B = ($60 / (1 + 12%)^1) + ($2.30 / (1 + 12%)^2) + ($0.20 / (1 + 12%)^3) + ($5.00 / (1 + 12%)^4) + ($1.60 / (1 + 12%)^5) = $59.63

b-2. Which plan will provide the higher present value for the future dividends?

From part b-1, we have:

Present value of future dividends of Plan A = $8.29

Present value of future dividends of Plan B = $59.63

Based on the above, Plan B will provide the higher present value for the future dividends.

8 0
2 years ago
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