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Chapter 2: 14BPa (page 80)
Gates Appliances has a return-on-assets (investment) ratio of 8 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
Return on equity, when the debt-to-total assets ratio is 40 percent: 13.33%.
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Lemon Auto Wholesalers had sales of \(1,000,000 last year, and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was \)11,000 and interest expense for the year was \(8,000. The firm’s tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to \)1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at \(11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to \)15,800. The firm’s tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?
Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows:
| Sales | \( 2790000 |
| Cost of goods sold | 1790000 |
| Gross Profits | \)1000000 |
| Selling and administrative expenses | 302000 |
| Operating profits | \(698000 |
| Interest Expense | 54800 |
| Income before taxes | \)643200 |
| Taxes30% | 192960 |
| Income after-tax | $ 450240 |
Compute the profit margin for 20X1.
Frantic Fast Foods had earnings after taxes of $420,000 in 20X1 with 309,000 shares outstanding. On January 1, 20X2, the firm issued 20,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent.
a. Compute earnings per share for the year 20X1.
b. Compute earnings per share for the year 20X2.
Question:The Haines Corp. shows the following financial data for 20X1 and 20X2:
20X1 | 20X2 | |
Sales | \(3,230,000 | \)3,370,000 |
Cost of goods sold | 2,130,000 | 2,850,000 |
Gross profits | \(1,100,000 | \)520,000 |
Selling and administrative expenses | 298,000 | 227,000 |
Operating profits | \(802,000 | \)293,000 |
Interest expense | 47,200 | 51,600 |
Income before taxes | \(754,800 | \)241,400 |
Taxes (35%) | 264,180 | 84,490 |
Income after tax | \(490,620 | \)156,910 |
For each year, compute the following and indicate whether it is increasing or
decreasing profitability in 20X2 as indicated by the ratio:
b. Selling and administrative expense to sales.
In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.
b. To what do you attribute the phenomenon shown in part a?
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