FIN2601 Assignment 1 (QUIZ ANSWERS)
Semester 1, 2024 - DUE 10 April 2024
QUESTION 1: Which one of the following statements articulates the distinction between the
capital market and the money market?
4. The capital market focuses on equity and debt securities for long-term financing,
whereas the money market deals with short-term borrowing and lending, typically
less than a year.
QUESTION 2: Which one of the following statements about sole proprietorships is correct?
3. The owner of a sole proprietorship may be forced to sell personal assets to pay
company debts.
QUESTION 3: A typical companies has diverse shareholders, ranging from individuals holding
a few shares to large institutions with significant holdings. To ensure that the priorities and
concerns of this varied shareholder base are met, which approach should a financial manager
adopt?
3. The financial manager should work to maximize the value of the investments of all
shareholders.
QUESTION 4: The financial metrics for Crystal Globe Travel include a total asset turnover of
1.25, a return on equity (ROE) of 14.30%, and a debt ratio of 15%. With total assets amounting
to R3 588 as per the statement of financial position, and considering the financing structure
comprising both debt and equity, what is the net profit margin of the company?
Given:
Total Asset Turnover = 1.25
Return on Equity (ROE) = 14.30%
Debt Ratio = 15%
Total Assets = R3,588
Formula: Net Profit Margin = ROE * (1 - Debt Ratio)
Calculation: Net Profit Margin = 14.30% * (1 - 0.15) Net Profit Margin = 14.30% * 0.85 Net
Profit Margin = 12.155%
Answer: The net profit margin of Crystal Globe Travel is 12.155%.
,QUESTION 5: Noyolla Asset Management reports earnings before interest and tax (EBIT) of
R12 550. The company's times interest earned ratio is 1.33, the tax rate is 40%, and the debt ratio
is 43.1%, with total assets valued at R60 647. What is the company's return on equity (ROE)?
Calculation:
First, let's find the interest expense:
Interest Expense = EBIT / Times Interest Earned Ratio
Interest Expense = R12,.33
Interest Expense = R9,436.09
Next, let's find the net income:
Net Income = EBIT - Interest Expense
Net Income = R12,550 - R9,436.09
Net Income = R3,113.91
Now, let's calculate the average total assets:
Average Total Assets = Total Assets at the beginning + Total Assets at the end / 2
Average Total Assets = R60,647
Now, let's calculate the total liabilities:
Total Liabilities = Debt Ratio * Total Assets
Total Liabilities = 0.431 * R60,647
Total Liabilities = R26,165.16
Now, let's calculate the equity:
Equity = Total Assets - Total Liabilities
Equity = R60,647 - R26,165.16
Equity = R34,481.84
Finally, let's calculate the Return on Equity (ROE):
ROE = Net Income / Average Equity
, ROE = R3,113.91 / R34,481.84
ROE ≈ 0.0902 or 9.02%
Answer: The company's return on equity (ROE) is approximately 9.02%.
QUESTION 6: The Digital Warehouse has an outstanding debt of R580 000 with an interest
rate of 9.15%. The company's sales amount to R (number missing), the tax rate is 40%, and the
net profit margin is 3.5%. What is the company’s time’s interest earned ratio?
Solution :
To calculate the time interest earned ratio (TIE), we need to find the earnings before interest and
taxes (EBIT) first. Then, we can use the formula for TIE, which is:
TIE = EBIT / Interest Expense
Given that EBIT can be calculated using the net profit margin and sales, we'll proceed with these
calculations:
1. Calculate EBIT:
EBIT = Net Profit / (1 - Tax Rate)
2. Find the interest expense:
Interest Expense = Total Debt * Interest Rate
3. Calculate the TIE ratio:
TIE = EBIT / Interest Expense
Let's plug in the given values:
1. Net Profit Margin = 3.5%
2. Total Debt = R580,000
3. Interest Rate = 9.15%
4. Tax Rate = 40%
5. Sales amount (given value)
Let's denote Sales as 'S' for calculation purposes:
1. Calculate EBIT:
Net Profit = Net Profit Margin * Sales
= 0.035 * S
EBIT = Net Profit / (1 - Tax Rate)
= (0.035 * S) / (1 - 0.40)
= (0.035 * S) / 0.60
Semester 1, 2024 - DUE 10 April 2024
QUESTION 1: Which one of the following statements articulates the distinction between the
capital market and the money market?
4. The capital market focuses on equity and debt securities for long-term financing,
whereas the money market deals with short-term borrowing and lending, typically
less than a year.
QUESTION 2: Which one of the following statements about sole proprietorships is correct?
3. The owner of a sole proprietorship may be forced to sell personal assets to pay
company debts.
QUESTION 3: A typical companies has diverse shareholders, ranging from individuals holding
a few shares to large institutions with significant holdings. To ensure that the priorities and
concerns of this varied shareholder base are met, which approach should a financial manager
adopt?
3. The financial manager should work to maximize the value of the investments of all
shareholders.
QUESTION 4: The financial metrics for Crystal Globe Travel include a total asset turnover of
1.25, a return on equity (ROE) of 14.30%, and a debt ratio of 15%. With total assets amounting
to R3 588 as per the statement of financial position, and considering the financing structure
comprising both debt and equity, what is the net profit margin of the company?
Given:
Total Asset Turnover = 1.25
Return on Equity (ROE) = 14.30%
Debt Ratio = 15%
Total Assets = R3,588
Formula: Net Profit Margin = ROE * (1 - Debt Ratio)
Calculation: Net Profit Margin = 14.30% * (1 - 0.15) Net Profit Margin = 14.30% * 0.85 Net
Profit Margin = 12.155%
Answer: The net profit margin of Crystal Globe Travel is 12.155%.
,QUESTION 5: Noyolla Asset Management reports earnings before interest and tax (EBIT) of
R12 550. The company's times interest earned ratio is 1.33, the tax rate is 40%, and the debt ratio
is 43.1%, with total assets valued at R60 647. What is the company's return on equity (ROE)?
Calculation:
First, let's find the interest expense:
Interest Expense = EBIT / Times Interest Earned Ratio
Interest Expense = R12,.33
Interest Expense = R9,436.09
Next, let's find the net income:
Net Income = EBIT - Interest Expense
Net Income = R12,550 - R9,436.09
Net Income = R3,113.91
Now, let's calculate the average total assets:
Average Total Assets = Total Assets at the beginning + Total Assets at the end / 2
Average Total Assets = R60,647
Now, let's calculate the total liabilities:
Total Liabilities = Debt Ratio * Total Assets
Total Liabilities = 0.431 * R60,647
Total Liabilities = R26,165.16
Now, let's calculate the equity:
Equity = Total Assets - Total Liabilities
Equity = R60,647 - R26,165.16
Equity = R34,481.84
Finally, let's calculate the Return on Equity (ROE):
ROE = Net Income / Average Equity
, ROE = R3,113.91 / R34,481.84
ROE ≈ 0.0902 or 9.02%
Answer: The company's return on equity (ROE) is approximately 9.02%.
QUESTION 6: The Digital Warehouse has an outstanding debt of R580 000 with an interest
rate of 9.15%. The company's sales amount to R (number missing), the tax rate is 40%, and the
net profit margin is 3.5%. What is the company’s time’s interest earned ratio?
Solution :
To calculate the time interest earned ratio (TIE), we need to find the earnings before interest and
taxes (EBIT) first. Then, we can use the formula for TIE, which is:
TIE = EBIT / Interest Expense
Given that EBIT can be calculated using the net profit margin and sales, we'll proceed with these
calculations:
1. Calculate EBIT:
EBIT = Net Profit / (1 - Tax Rate)
2. Find the interest expense:
Interest Expense = Total Debt * Interest Rate
3. Calculate the TIE ratio:
TIE = EBIT / Interest Expense
Let's plug in the given values:
1. Net Profit Margin = 3.5%
2. Total Debt = R580,000
3. Interest Rate = 9.15%
4. Tax Rate = 40%
5. Sales amount (given value)
Let's denote Sales as 'S' for calculation purposes:
1. Calculate EBIT:
Net Profit = Net Profit Margin * Sales
= 0.035 * S
EBIT = Net Profit / (1 - Tax Rate)
= (0.035 * S) / (1 - 0.40)
= (0.035 * S) / 0.60
