Question

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.

Sheet (Millions of $) Assets 2007
Cash and securities $2,475
Accounts receivable 12,650
Inventories 17,600
Total current assets $32,725
Net plant and equipment $22,275
Total assets $55,000

Liabilities and Equity:

Accounts payable $10,450
Notes payable 7,700
Accruals 6,050
Total current liabilities $24,200
Long-term bonds $18,700
Total debt $42,900
Common stock $0
Retained earnings 12,100
Total common equity $12,100
Total liabilities and equity $55,000
Income Statement (Millions of $) 2007
Net sales $99,000
Operating costs except depreciation 92,565
Depreciation 1,733
Earnings bef interest and taxes (EBIT) $4,703
Less interest 1,650
Earnings before taxes (EBT) $3,053
Taxes 1,068
Net income $1,984

Other data: Shares outstanding (millions) 500.00
Common dividends (millions of $) $694.44

Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39


Required:
a. What is the firm's ROE?
b. What is the firm's profit margin?
c. What is the firm's operating margin?
d. What is the firm's P/E ratio?

Answer 1

See solutions below

Step-by-step explanation:

a. ROE = Net income / Total equity

= $1,984 / $12,100

= 16.40%

b. Firm's profit margin = Net income / sales

= 1,984 / 99,000

= 2.00%

c. Firm's operating margin = Operating income / Net sales

Operating income = Net sales - Operating costs - depreciation

= 99,000 - 92,565 - 1,733

= 4,702

= 4,702 / 99,000

= 4.75%

d. Firm's P/E ratio = Market Price per share / Earnings per share

= 43.39 / [ 1,984 / 500 ]

= 43.39 / 3.968

= 10.93