Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 2: 13BP (page 80)

Front Beam Lighting Company has the following ratios compared to its industry for last year:


Front Beam Lighting

Industry

Return on assets

12%

5%

Return on equity

16%

20%

Explain why the return-on-equity ratio is so much less favorable than the return on-assets ratio compared to the industry. No numbers are necessary; a one- sentence answer is all that is required.

Short Answer

Expert verified

Because Front Beam has a lower debt/total assets ratio than the industry.

Step by step solution

01

Return on asset

Return on assets is computed by dividing the net income by the company's total assets.It shows the profitability of the company in relation to its total assets of the company.

02

Return on equity

Per the Dupont analysis, return on equity is computed as follows:

Returnonasset=Returnonequity×1-DebtAsset

If the debt-asset ratio is less, the return on equity is also less and vice-versa

03

FrontBeam's Debt/Asset Ratio

DebetAsset=1-ReturnonassetReturnOnEquity=1-12%6%=0.25=25%

04

Industry's Debt/Asset Ratio

DebtAsset=1-ReturnonAssetReturnonEquity=1-5%20%=0.75=75%

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.

Using the Du Pont method, evaluate the effects of the following relationships forthe Butters Corporation:

c. What would happen to return on equity if the debt-to-total-assets ratio

decreased to 35 percent?

Billy’s Crystal Stores Inc. has assets of $5,960,000 and turns over its assets 1.9 times per year. Return on assets is 8 percent. What is the firm’s profit margin (return on sales)?

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

e. Return on assets (investment).

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

If we divide users of ratios into short-term lenders, long-term lenders, andstockholders,which ratios would each group be most interested in, and for

what reasons?
See all solutions

Recommended explanations on Business Studies Textbooks

Strategic Direction

Read Explanation

Business Case Studies

Read Explanation

Influences On Business

Read Explanation

Managers

Read Explanation

Managerial Economics

Read Explanation

Business Operations

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free