## Answers

**Note:** As per answering guidelines, only the first question has been answered.

Note 1: Calculation of interest expense: Formula Total Assets Given in the question Debt to Assets ratio Given in the question Total Assets * Debt to Total debt assets ratio Conservative 2,00,000 50% Intermediate 2,00,000 50% Aggressive 2,00,000 50% 1,00,000 1,00,000 1,00,000 Breakdown of debt in %: - Long-term debt - Short-term debt 100% 0% Given in the question Given in the question 50% 50% 0% 100% Breakdown of debt in $: - Long-term debt - Short-term debt 1,00,000 Total debt* breakdown % Total debt* breakdown % 50,000 50,000 1,00,000 Interest expense: - Long-term debt - Short-term debt 10,000 Long-term debt* 10% Short-term debt*7% 5,000 3,500 7,000 Total interest expense Long-term debt interest + Short-term debt interest 10,000 8,500 7,000

Solution (a) - Calculation of Return on Equity: Formula Total Assets Given in the question EBIT % Given in the question Earnings before interest and taxes Total Assets *EBIT% Interest expense As calculated in Note 1 Earnings before taxes (EBT) EBIT-Interest expense Taxes EBT*50% Earnings after taxes EBT-Taxes | Conservative 2,00,000 20% 40,000 10,000 30,000 15,000 15,000 Intermediate 2,00,000 20% 40,000 8,500 31,500 15,750 15,750 Aggressive 2,00,000 20% 40,000 7,000 33,000 16,500 16,500 Total debt Equity Shareholders funds 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 As calculated in Note 1 Total assets - Total debt (Earnings after taxes/Equity shareholders funds)*100 Return on Equity (ROE) 15.00% 15.75% 16.50% Solution (b)- Calculation of Current Ratio: Formula Conservative 2,00,000 Intermediate 2,00,000 Aggressive 2,00,000 Total Assets Ratio of current assets to total assets Given in the question 50% 50% 50% Current Assets Total Assets * Ratio of current assets 1,00,000 1,00,000 1,00,000 As calculated in Note 1 Short-term debt (considered equal to current liabilities in absence of any more information) Current Ratio 50,000 1,00,000 Current Assets/Current liabilities Not defined 2

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