1. Based on the following information, answer the questions.

Korean Electronics
2017 Income Statement
Sales Costs of goods sold EBIT Taxes (50%) Net income		1,000,000 800,000 200,000 (100,000) (100,000)
2017 Balance Sheet
Assets		Liabilities and Equity
Current assets Net fixed assets Total	(1,000,000) (6,000,000) (7,000,000)	Debt Equity Total	(5,000,000) (2,000,000) (7,000,000)

1. If Profit Margin (PM) is 10 percent, i) what is the net income? If ROEis 5 percent, ii) what is the total equity? Use the net income that you figured out in the previous question. (40points)

PM=Net Income/Sales, 0.1=NI/1,000,000 NI=100,000

ROE=Net Income/Total Equity, 0.05=100,000/TE TE=2,000,000

2. If the firm has a debt-to-equity ratioof 2.5, what is the Total Debt ratio (TD/TA)?(30 points)

Debt-to-equity ratio=TD/TE, 2.5=TD/2,000,000 TD=5,000,000

TD/TA=5,000,000/7,000,000=5/7

3. The firm plans to reduceits equity multiplier (EM). Other things equal, what will happen to its return on equity (ROE)? Does it increase or decrease? (30points)

ROE=NI/TE = (NI/Sales)*(Sales/Total Asset)*(Total Asset/Total Equity)

= PM*TAT*EM If EM decreases, then ROE will decrease