Question

Jerry Rice and Grain Stores has $4,000,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 4 times per year. It has $143,000 in current liabilities and $308,000 in long-term liabilities. a. What is its return on stockholders' equity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Return on stockholders' equity b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.20, what will be the new return on stockholders equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) New return on stockholders' equity 2 FI F2 ado F3 FS

Answer 1

Solution: a) Asset turnover=sales/total assets 4=4000000/total assets total assets=4000000/4 total assets 1,000,000 | 549,000 stockholder equity=Total assets-Total liabiliites 1000000-143000-308000 140,000 Net income-sales x profit margin 4000000*3.5% 25.50% Return on equity=Net income/stockholder equity 140000/549000 b) Asset turnover-sales/total assets 4.2-sales/1000000 sales-4.2*1000000 sales 4,200,000 147,000 Net income-sales x profit margin 4200000*3.5% 26.78% Return on equity=Net income/stockholder equity 147000/549000