SHOW WORK FOR ALL QUESTIONS

Arredondo, Inc., has current assets of $7 million, net fixed assets of $18 million, current liabilities of $1.5 million, long-term debt of $4 million, sales of 10 million, costs of 3 million, depreciation expense of 0.2 million, net income of 4.74 million. The tax rate is 21%.

1. What is the value of the shareholders equity and how much is net working capital? (3' *2)

2. Compute the company's taxable income, interest expense, and tax. (3' * 3)

3. Suppose the company pays out $2 million in cash dividends, what is the addition to retained earnings? What is the retention ratio? (3' * 2)

4. What are the company's ROE and sustainable growth rate? If the company increases its cash dividends, ceteris paribus, would the sustainable growth rate increase or decrease? (3' * 3)