Problems
3-1.
Griffey Junior Wear, Inc., has $800,000 in assets and $200,000 of debt. It reports net income of $100,000.
a. What is the return on assets?
b. What is the return on stockholders' equity?
Solution:
Griffey Junior Wear
a.
Return on assets ?investment??Net incomeTotal assets
$100,000$800,000?12.5%
b.
Return on equity?Net incomeStockholders' equityStockholders' equity?total assets?total debt?$800,000?$200,000?$600,000
Net incomeStockholder's equity?$100,000$600,000?16.67%%OR
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-1. Continued
Return on equity?Return on assets ?investment??1?Debt/Asset$200,000$800,00012.5%?25%s?Debt/Assets?
Return on equity? 3-2.
12.5%.75?1?.25??16.67%
Bass Chemical, Inc., is considering expanding into a new product line. New assets to support expansion will cost $1,200,000. Bass estimates that it can generate $2
million in annual sales, with a 5 percent profit margin. What would net income and return on assets (investment) be for the year?
Solution:
Bass Chemical, Inc.
Net income
?Sales?profit margin?$2,000,000?0.05?$100,000
Return on assets (investment)
?Net incomeTotal assets$100,000$1,200,000?
?8.33%
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-3.
Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of $750,000. It will turn over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year?
Solution:
Return
Franklin Mint and Candy Shop
Net income?Sales?Profit Margin?$750,000?0.06?$45,000Assets?SalesTotal asset turnover?$750,0002.5?$300,000on assets ?investment??Net incomeTotal assets$45,000
?$300,000?15%
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Copyright ? 2005 by The McGraw-Hill Companies, Inc.
3-4.
Hugh Snore Bedding, Inc., has assets of $400,000 and turns over its assets 1.5 times per year. Return on assets is 12 percent. What is its profit margin (return on sales)?
Solution:
Hugh Snore Bedding, Inc.
Sales?Assets?total asset turnover?$400,000?1.5%?$600,000Net income?Assets?Return on assets$48,000?$400,000?12%Net incomeSales?$48,000/$600,000?8%
Copyright ? 2005 by The McGraw-Hill Companies, Inc.
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