Chapter 2: 16BP_b (page 80)

Jerry Rice and Grain Stores has $4,780,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times per year. It has $123,000 in current liabilities and $349,000 in long-term liabilities.
b. If the asset base remains the same as computed in part a, but total asset
turnover goes up to 3, what will be the new return on stockholders’ equity?Assume that the profit margin stays the same as do current and long-term
liabilities.

Short Answer

Expert verified

Return on stockholder’s equity: 18.41%

Step by step solution

Net Sales

$\begin{array}{rcl} Net sales & = & Average total asset \times Total asset turnover ratio \\ = & $ 1, 770, 370 \times 3 \\ = & $ 5, 311, 110 \end{array}$

Net income

$\begin{array}{rcl} Net income & = & Sales \times profit margin \\ = & $ 5, 311, 110 \times 4.5 % \\ = & $ 239, 000 \end{array}$

Shareholder’s equity

$\begin{array}{rcl} Shareholder' s equity & = & Total assets - Current liabilities - Long term liabilities \\ = & $ 1, 770, 370 - $ 123, 000 - $ 349, 000 \\ = & $ 1, 298, 370 \end{array}$

Return on equity

$\begin{array}{rcl} Return on shareholder' s equity & = & \frac{Net income}{Shareholder' s equity} \\ = & \frac{$ 239, 000}{$ 1, 298, 370} \\ = & 18.41 % \end{array}$

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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

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

	20X1	20X2
Sales	\(8,000,000	\)10,000,000
Cost of goods sold	6,000,000	9,000,000
Inventory	800,000	1,000,000

Short Answer

Step by step solution

Net Sales

Net income

Shareholder’s equity

Return on equity

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