Chapter 2: 17BP_c (page 80)

Assume the following data for Cable Corporation and Multi-Media Inc.
Capable corporation
Muli-media inc
Net income
\(31,200
\)140,000
Sales
317,000
2,700,000
Total assets
402,000
965,000
Total debts
163,000
542,000
Stockholder’s equity
239,000
423,000
c. Discuss the factors from part b that added or detracted from one firm
having a higher return on stockholders’ equity than the other firm as
computed in part a.

Short Answer

Expert verified

The return on stockholder’s equity of Multimedia Incorporation is more than that of Cable corporation because the return on the sales of Capable corporation has a higher return than Multimedia Incorporation (9.84% vs. 5.19%).

However, Multimedia Incorporation has a higher return than Capable corporation on total assets (14.51% versus 7.76%) because the total asset turnover of Multimedia Incorporation is more than that of the Cable Corporation (279.79% versus 78.86%). This factor alone leads to a higher return on total assets.

Step by step solution

Comparison of return on stockholder’s equity from part a

	Capable corporation	Multimedia Incorporation
Return on stockholder’s Equity	13.05%	33.10%

Return on stockholder’s equity of multimedia Incorporation is more than that of Capable corporation because the net income of multimedia incorporation is more than that of Capable corporation.

Comparison of other variables from part b

	Capable corporation	Multimedia Incorporation
Net income to sales	9.84%	5.19%
Net Income to total assets	7.76%	14.51%
Sales to total assets	78.86%	279.79%

Net income to sales of Multimedia incorporation is less than that of Capable corporation due to the increase in the sale of Multimedia incorporation.

Net income to total assets of multimedia incorporation is more than that of Capable corporation because the total assets of Multimedia incorporation are more than that of Capable corporation.

In addition, sales to total assets of Multimedia incorporation are more than that of Capable corporation because the net sales of Multimedia incorporation are more than that of Capable corporation.

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Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

	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

Comparison of return on stockholder’s equity from part a

Comparison of other variables from part b

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	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder’s equity	239,000	423,000