Chapter 2: Q9BP (page 79)

Network Communications has total assets of $1,500,000 and current assets of $612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its return on sales is 8 percent. What is its return on stockholders’ equity?

Short Answer

Expert verified

The return on stockholder’s equity of the company is 18.05%.

Step by step solution

Fixed assets of the company

$F i x e d a s s e t s = T o t a l a s s e t - C u r r e n t a s s e t = $ 1, 500, 000 - $ 612, 000 = $ 888, 000$

Sales of the company

$S a l e = T o t a l f i x e d a s s e t \times F i x e d a s s e t t u r n o v e r r a t i o = $ 888, 000 \times 3 = $ 2, 664, 000$

Net income of the company

$N e t i n c o m e = S a l e s \times P r o f i t m a r g i n = $ 2, 664, 000 \times 8 % = $ 213, 120$

Stockholder’s equity of the company

$S t o c k h o l d e r ’ s e q u i t y = T o t a l a s s e t s - T o t a l d e b t s = $ 1, 500, 000 - $ 319, 000 = $ 1, 181, 000$

Return on stockholder’s equity

$R e t u r n o n s t o c k h o l d e r ’ s e q u i t y = \frac{N e t i n c o m e}{S t o c k h o l d e r ’ s e q u i t y} = \frac{$ 213, 120}{$ 1, 181, 000} = 18.05 %$

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Current assets		Liabilities
Cash	\(15,000	Accounts payable	\)17,000
Accounts receivable	20,000	Notes payable	25,000
Inventory	30,000	Bonds payable	55,000
Prepaid expenses	12,500

Fixed assets		Stockholder’s equity
Plant and equipment (gross) Less: accumulated depreciation	\(255,000 51,000	Preferred stock	\)25,000
Net plant and equipment	\(204,000	Common stock	60,000
		Paid in capital	30,000
		Retained earnings	69,500
Total assets	\)281,500	Total liabilities and stockholder’s equity	\(281,500

Accumulated depreciation	\(309,000
Retained earnings	187,000
Cash	14,000
Bonds payable	136,000
Accounts receivable	54,000
Plant and equipment – original cost	775,000
Accounts payable	35,000
Allowance for bad debts	9,000
Common stock, \)1 par, 100,000 share outstanding	100,000
Inventory	70,000
Preferred stock, $59 par, 1,000 share outstanding	59,000
Marketable securities	24,000
Investments	20,000
Notes payable	34,000
Capital paid in excess of par (common stock)	88,000

Network Communications has total assets of \(1,500,000 and current assets of \)612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its return on sales is 8 percent. What is its return on stockholders’ equity?

Short Answer

Step by step solution

Fixed assets of the company

Sales of the company

Net income of the company

Stockholder’s equity of the company

Return on stockholder’s equity

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