1. Explain why the costs of debt and equity are expected to increase as leverage increase? (Note: We didn't cover this directly in class, but we talked about this indirectly. Hint: It has to do with risk) 2. If the Debt-to-Asset ratio is .46, what is the Debt-to-Equity ratio? 3. Suppose a farm business indicates an average cost of farm debt of 12%, a rate-of-return on farm assets of 15%, and a debt-to-equity ratio of 1.0. What is the firm's rate-of-return on farm equity? What would be its rate-of-return on farm equity if the debt-to-equity ratio were 2.0? (HINT: I do not give you Asset-to-Equity, but you can calculate it) 4. Use Table 1 and Table 2 to calculate the following ratios. (Use Net Income, not EBIT, for net income and Total Sales, not gross profit margin, for sales numbers) a. Profit Margin b. Asset Turnover Ratio C. Debt-to-Asset d. Debt-to-Equity e. Current Ratio f. Quick Ratio (Also called Acid Test Ratio) g. Return on Equity h. Return on Assets Table 1. Hammer Down Corp. Balance Sheet, Dec. 31, 2019 Current Asset Cash And Cash Equivalents Account Receivables Inventory Other Current Assets Total Current Assets $ $ $ $ $ 851,000.00 4,068,000.00 7,953,000.00 5,520,000.00 18,392,000.00 Non-Current Assets Long Term Investments Property Plant and Equipment Intangible Assets Other Non-Current Assets Total Non-Current Assets $ $ $ $ $ 5,388,000.00 9,948,000.00 3,834,000.00 938,000.00 20,108,000.00 Total Assets $ 38,500,000.00 Current Liabilities Accounts Payable Current Portion of Long Term Debt Other Current Liabilities Total Current Liabilities $ $ $ $ 2,609,000.00 595,000.00 5,819,000.00 9,023,000.00 Non-Current Liabilities Long Term Liabilities Other Long Term Liabilities Total Non-Current Liabilities $ $ $ 5,981,000.00 2,291,000.00 8,272,000.00 Total Liabilities $ 17,295,000.00 Equity $ 21,205,000.00 Table 2. Hammer Down Corp. Income Statement, Jan 1, 2019 to Dec 31, 2019 Revenue Total Sales Cost of Goods Sold Gross Profit/Margin $ 17,068,000.00 $ 15,887,000.00 $ 1,181,000.00 Operating Expenses Selling, General, and Administrative Others Total Operating Expenses $ $ $ 567,000.00 4,000.00 571,000.00 | Earnings Before Interest and Taxes (EBIT) $ 610,000.00 Interest Expense $ 89,000.00 Earnings Before Taxes (EBT) $ 521,000.00 Income Tax Expense $ 86,000.00 Net Income $ 435,000.00