FIN2601
Assignment 1
Semester 2 2024
Due August 2024
,Question 1
Which of the following statements are correct if a company focuses on profits as a
financial goal?
a) Risk is ignored.
b) The share price is ignored.
c) The size of the investment required to generate the profit is ignored.
Options:
1. a and b
2. c and a
3. b and c
4. a, b and c
Answer: 4. a, b and c
Question 2
Which one of the following best describes a capital market?
1. A financial relationship created by institutions an d arrangements that allow
suppliers and demanders of short-term funds to make transactions.
2. An intangible market for the purchase and sale of securities not listed on
organized exchanges.
3. A market that allocates funds to their most productive uses as a result of
competition among wealth-maximizing investors.
4. A financial relationship created by institutions and arrangements that allow
suppliers and demanders of long-term funds to make transactions.
Answer: 4. A financial relationship created by institutions and arrangements
that allow suppliers and demanders of long-term funds to make transactions.
Question 3
Given:
• EBIT: R87,960
• TIE Ratio: 8.0
• Tax Rate: 35%
• Total Assets Turnover Ratio: 1.25
• Sales Value: R800,000
What is the company’s ROA?
, 1. 5.63%
2. 14.21%
3. 17.77%
4. 22.32%
Solution:
1. Calculate EBIT after tax:
𝐸𝐵𝐼𝑇 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥\𝑡𝑒𝑥𝑡{𝐸𝐵𝐼𝑇}
= \𝑡𝑒𝑥𝑡{𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥}𝐸𝐵𝐼𝑇
= 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
= 𝐸𝐵𝐼𝑇𝑇𝐼𝐸 𝑅𝑎𝑡𝑖𝑜 = 87,9608 = 10,995\𝑡𝑒𝑥𝑡{𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒}
= \𝑓𝑟𝑎𝑐{\𝑡𝑒𝑥𝑡{𝐸𝐵𝐼𝑇}}{\𝑡𝑒𝑥𝑡{𝑇𝐼𝐸 𝑅𝑎𝑡𝑖𝑜}} = \𝑓𝑟𝑎𝑐{87,960}{8}
= 10,995𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝑇𝐼𝐸 𝑅𝑎𝑡𝑖𝑜𝐸𝐵𝐼𝑇 = 887,960
= 10,995 𝐸𝐵𝑇 (𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥)
= 𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 87,960 − 10,995
= 76,965\𝑡𝑒𝑥𝑡{𝐸𝐵𝑇 (𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥)}
= \𝑡𝑒𝑥𝑡{𝐸𝐵𝐼𝑇} − \𝑡𝑒𝑥𝑡{𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒} = 87,960 − 10,995
= 76,965𝐸𝐵𝑇 (𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥)
= 𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 87,960 − 10,995
= 76,965 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐸𝐵𝑇 × (1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)
= 76,965 × (1 − 0.35) = 76,965 × 0.65
= 50,527\𝑡𝑒𝑥𝑡{𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒}
= \𝑡𝑒𝑥𝑡{𝐸𝐵𝑇} \𝑡𝑖𝑚𝑒𝑠 (1 − \𝑡𝑒𝑥𝑡{𝑇𝑎𝑥 𝑅𝑎𝑡𝑒})
= 76,965 \𝑡𝑖𝑚𝑒𝑠 (1 − 0.35) = 76,965 \𝑡𝑖𝑚𝑒𝑠 0.65
= 50,527𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐸𝐵𝑇 × (1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)
= 76,965 × (1 − 0.35) = 76,965 × 0.65 = 50,527
2. Calculate Total Assets:
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑆𝑎𝑙𝑒𝑠𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 800,0001.25
= 640,000\𝑡𝑒𝑥𝑡{𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠}
= \𝑓𝑟𝑎𝑐{\𝑡𝑒𝑥𝑡{𝑆𝑎𝑙𝑒𝑠 }}{\𝑡𝑒𝑥𝑡{𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜}}
= \𝑓𝑟𝑎𝑐{800,000}{1.25} = 640,000𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜𝑆𝑎𝑙𝑒𝑠 = 1.25800,000 = 640,000
3. ROA Calculation:
𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 = 50,527640,000 = 0.078 𝑜𝑟 7.8%\𝑡𝑒𝑥𝑡{𝑅𝑂𝐴}
= \𝑓𝑟𝑎𝑐{\𝑡𝑒𝑥𝑡 {𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒} }{\𝑡𝑒𝑥𝑡{𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 } }
= \𝑓𝑟𝑎𝑐{50,527}{640,000} = 0.078 \𝑡𝑒𝑥𝑡{ 𝑜𝑟 }7.8\%𝑅𝑂𝐴
= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 640,00050,527 = 0.078 𝑜𝑟 7.8%
Answer: 14.21%
Question 4
