3-1. Continued
Return on equity?Return on assets ?investment??1?Debt/Asset$200,000$800,00012.5%?25%s?Debt/Assets?
Return on equity? 3-2.
12.5%.75?1?.25??16.67%
Bass Chemical, Inc., is considering expanding into a new product line. New assets to support expansion will cost $1,200,000. Bass estimates that it can generate $2
million in annual sales, with a 5 percent profit margin. What would net income and return on assets (investment) be for the year?
Solution:
Bass Chemical, Inc.
Net income
?Sales?profit margin?$2,000,000?0.05?$100,000
Return on assets (investment)
?Net incomeTotal assets$100,000$1,200,000?
?8.33%
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-3.
Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of $750,000. It will turn over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year?
Solution:
Return
Franklin Mint and Candy Shop
Net income?Sales?Profit Margin?$750,000?0.06?$45,000Assets?SalesTotal asset turnover?$750,0002.5?$300,000on assets ?investment??Net incomeTotal assets$45,000
?$300,000?15%
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-4.
Hugh Snore Bedding, Inc., has assets of $400,000 and turns over its assets 1.5 times per year. Return on assets is 12 percent. What is its profit margin (return on sales)?
Solution:
Hugh Snore Bedding, Inc.
Sales?Assets?total asset turnover?$400,000?1.5%?$600,000Net income?Assets?Return on assets$48,000?$400,000?12%Net incomeSales?$48,000/$600,000?8%
Copyright ? 2005 by The McGraw-Hill Companies, Inc.
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3-5.
Easter Egg and Poultry Company has $2,000,000 in assets and $1,400,000 of debt. It reports net income of $200,000.
a. What is the return on assets?
b. What is the return on stockholders’ equity?
c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin
(return on sales)?
Solution:
Easter Egg and Poultry Company
a.
Return on assets (investment)?Net incomeTotal assets b.
Return on equity$200,000$2,000,000?10%
?Net incomeStockholders' equity
Stockholders' equity?total assets?total debt?$2,000,000?$1,400,000
Net incomeStockholders' equity?$600,000
?$200,000$600,000?33%
OR
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-5. Continued
Return on equity?
Return on assets (investment)?1?Debt/Asset$1,400,000$2,000,00010%?70%.30s?
Debt/Assets?Return on equity??1?.70??33%
c. Sales ? total assets ? total assets turnover ?$2,000,000?2.5?$5,000,000
?$200,000$5,000,000?4%Profit margin 3-6.
?Net incomeSalesSharpe Razor Company has total assets of $2,500,000 and current assets of $1,000,000. It turns over its fixed assets 5 times a year. It has $700,000 of debt. Its return on sales is 3 percent. What is its return on stockholders' equity?
Solution:
Sharpe Razor Company
Copyright ? 2005 by The McGraw-Hill Companies, Inc.
total assets – current assets Fixed assets $2,500,000 1,000,000 $1,500,000
Sales = Fixed assets x Fixed asset turnover = $1,500,000 x 5 = $7,500,000 total assets – debt Stockholders' equity
$2,500,000 700,000 $1,800,000
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