By NEAS - 7/8/2024 4:06:36 PM
FA Module 4 Profitability ratios practice exam questions
covering long-term debt, short term debt, other liabilities, common stock, additional paid-in capital, retained earnings, shareholders’ equity, financial leverage, net income, shareholder dividends, return on equity.
(The attached PDF file has better formatting.)
A firm’s balance sheet shows
December 31, 20X1 December 31, 20X2
Long-term and short term debt 84 91
Other liabilities 14 37
Common stock + additional paid-in capital 85 72
Retained earnings 32 49
The firm declared and paid shareholder dividends of 33 in 20X2.
Question 4.1: Shareholders’ equity
What is shareholders’ equity at December 31, 20X1 and 20X2?
Answer 4.1: (add stock and retained earnings)
● December 31, 20X1: 85 + 32 = 117
● December 31, 20X2: 72 + 49 = 121
Question 4.2: Total assets
What are total assets at December 31, 20X1 and 20X2?
Answer 4.2: (total assets = debt + other liabilities + shareholders’ equity)
● December 31, 20X1: 84 + 14 + 117 = 215
● December 31, 20X2: 91 + 37 + 121 = 249
Question 4.3: Financial leverage
What is the financial leverage at December 31, 20X1 and 20X2?
Answer 4.3: (financial leverage = total assets / shareholders’ equity)
● December 31, 20X1: 215 / 117 = 1.838
● December 31, 20X2: 249 / 121 = 2.058
Question 4.4: Net income
What is net income in 20X2?
Answer 4.4: 33 + (49 – 32) = 50
(net income = shareholder dividends + Δ(retained earnings) )
Question 4.5: Return on equity
What is the return on equity in 20X2?
Answer 4.5: 50 / ( (117 + 121) / 2) = 42.02%
(return on equity = net income / average shareholders’ equity)
Question 4.6: Return on assets
What is the return on assets in 20X2?
Answer 4.6: 50 / ( ( 215 + 249) / 2) = 21.55%
(return on assets = net income / average assets)
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