Question

Compute, Disaggregate, and Interpret Competitors' Rates of Return Selected balance sheet and income statement information for the drug retailers CVS Health Corporation and Walgreen Co. follows. Assume tax rate of 35%. CVS Health Walgreen $139,367 $76,392 156 4,644 2,031 74,252 37,182 71,526 35,481 Stockholders' equity-2014 37,963 20,561 Stockholders' equity-2013 37,938 19,454 $ millions) Sales revenue-2014 Interest expense-2014 Net income-2014 Total assets-2014 Total assets-2013 600 a. Compute the 2014 return on assets (ROA) for each company. (Round your answers to one decimal place.) CVS Health Walgreen ROA 0 96

Answer 1

a) CVS Health 6.4% Walgreen 5.6 % ROA Workings: Return on Assets (ROA) CVS Health = Net Income / Average Total assets $4,644 / [($74,252 + $71,526)/2] $4,644 / $72.889 6.4% Walgreen = $2,031 / [($37.182 + $35,481)/2] $2.031 / $36.331.50 5.6% b) PM AT CVS Health 3.3% 1.9 Walgreen 2.7 % 2.1 Workings: Profit Margin CVS Health = Net Income / Sales $4.644 / $139,367 3.3% Walgreen $2.031 / $76,392 2.7% Asset Turnover CVS Health = Sales / Average Total assets = $139,367 / [($74,252 + $71,526)/2] $139,367 / $72.889 1.9 Walgreen $76,392 / [($37.182 +$35,481)/2] = $76,392 / $36,331.50 2.1 ROE ROFL CVS Health 12.2 % 192.1% Walgreen 10.2 % 181.6 % Workings: Return on equity CVS Health = Net income / Average stockholders' equity = $4.644 / [($37.963 +$37.938)/2] = $4,644 / $37,950.50 12.2% Walgreen = $2,031 / [($20,561 + $19.454)/2] = $2,031 / $20,007.50 10.2% Return on financial leverage = Average Total assets/ Average stockholders' equity CVS Health = [(S74,252 + $71,526)/2] / [($37,963 + $37.938)/2] $72.889 / $37.950.50 192.1% Walgreen [($37.182 +$35.481)/2] / [($20,561 + $19.454)/2] $36,331.50 / $20,007.50 181.6%