CFA Practice Question
The following table presents selected common size income statement and balance sheet data for Curative Drugs.
If Curative had total debt of $34.5 million outstanding in year 4, what was the interest paid in that year?
A. $0.38 million
B. $3.80 million
C. $2.54 million
Explanation: This requires manipulation of several ratios. In year 4:
ROE = NI/Equity = 0.109 => NI = 0.109 x 86.25 = 9.40 million
Return on total capital = (NI + Interest) / (Total debt + Equity) = 0.081 => Interest = 0.081 x (34.5 + 86.25) - 9.40 = 0.38 million
Total-debt to equity = 0.40 = TD/Equity => Equity = 34.5/0.40 = 86.25 million
ROE = NI/Equity = 0.109 => NI = 0.109 x 86.25 = 9.40 million
Return on total capital = (NI + Interest) / (Total debt + Equity) = 0.081 => Interest = 0.081 x (34.5 + 86.25) - 9.40 = 0.38 million
User Contributed Comments 18
| User | Comment |
|---|---|
| uberstyle | Fantastic question. I just hope they don't ask any like it. Know your ratios! |
| dealsoutlook | damn..didnt know the ratio for ROTC :( |
| surob | Hard question |
| Nicholas | I too commend the AN team for this one. The RoTC got me as well. |
| sambra | yes, but RoTC = ebit/TC, so taxes are missing here : (Ni + Int)*(1-taxes)^-1/ total capital |
| grezavi | Doesn't EBIT stands for Earnings before Int Exp & taxes anyways, ROTC=EBIT/TC is a quicker way than indicated by sambra above. |
| 11Blaise | pretty excited to post my first comment ROTC-ROE = Interest Interest = 9,780,750-9,400,125= 380,000. |
| chingg2 | i would have just guessed and skipped this question to save time |
| copus | Agree with chingg2 - i would have taken a flyer on this one and moved onto the next question. |
| CJI19 | $.38mm only one that makes sense - $3.8mm on $34.5mm in debt would be 11%+ - No firm has a higher cost of debt than equity |
| birdperson | @cji19 -- i think that 2.54 could make sense... |
| janis36 | Unreal tournament. I don't believe I can do this in 90 sec ever. |
| Rsanches | good question |
| ashish100 | AN isn't supposed be exactly like the exams you bums. They're just trying to help you be extra prepared and pass the exam god forbid. Also if you are that good, it is POSSIBLE to do it in 90 secs. |
| mikus | Outstanding question! |
| will080912 | That question was a kille |
| atlootah | what a question |
| pigletin | i refuse to take time to remember these formula |