Question

Last year, K9 WebbWear, inc. reported an ROE of 27 percent. The firm's debt ratio was 60 percent, sales were $20 million, and the capital intensity was 1.25 times. This year K9 WebbWear plans to increase its debt ratio to 76 percent. The change will not affect sales or total assets, however, it will reduce the firm's profit margin to 9 percent culate the net income and profit margin for K9 WebbWear last year. (Enter your answer in millions of dollars rounded to 2 decimal places. Round your percentage answer to 2 decimal places.) Cal Net income (last year) Profit margin (last year) million By how much will the change in K9 WebbWear's debt ratio affect its ROE? ROE (this year) wil increase decrease

Answer 1

Answer to Part 1:

Capital Intensity Ratio = Total Assets / Total Sales
1.25 = Total Assets / $20 Million
Total Assets = $25 Million

Debt Ratio = Debt / Total Assets
0.60 = Debt / $25 Million
Debt = $15 Million

Total Assets = Total Debt + Total Equity
$25 Million = $15 Million + Total Equity
Total Equity = $10 Million

ROE = Net Income / Total Equity
0.27 = Net Income / $10 Million
Net Income = $2.70 Million

Profit Margin = Net Income / Sales * 100
Profit Margin = $2.70 Million / $20 Million * 100
Profit Margin = 13.50%

Answer to Part 2:

This Year:

Debt Ratio = Debt / Total Assets
0.76 = Debt / $25 Million
Debt = $19 Million

Total Assets = Total Debt + Total Equity
$25 Million = $19 Million + Total Equity
Total Equity = $6 Million

Profit Margin = Net Income / Sales * 100
9 = Net Income / $20 Million * 100
Net Income = $1.80 Million

ROE = Net Income / Total Equity
ROE = $1.80 Million/ $6 Million
ROE = 0.30 or 30%

ROE (This year) will increase by 4%.