Finance Chapter 3

Materials in this section derived from Foundations of Financial Management, 10th edition, by Stanley B Block and Geoffrey A. Hirt. | | | | | | |

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Problem 3 - 1 (was Pg 72 #3) Profitability Ratios | |

| Billy's Chrystal Stores, Inc. has assets of $5,000,000 and turns over its assets 1.2 times per year. | |

| Return on assets is 8%. What is the firm's profit margin (return on sales)? | |

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| Remember that Asset Turnover = Sales/Total Assets | | |

| or 1.2 | = | x / 5,000,000 | | then x = | 6,000,000 | | |

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| Return on assets = | Profit / Assets=.08= | x / 5,000,000 | x = | 400,000 | |

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| Profit Margin = Profit / Assets | = | 400000/6000000 | x = | 6.67% | |

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Problem 3 - 2 (was Pg 72 #5) Profitability Ratios | |

| Network Communications has total assets of $1,400,000 and current assets of $600,000. | |

| It turns over its fixed assets 4 times per year. It has $300,000 of debt. Its return on | |

| sales is 5%. What is its return on stockholders' equity? | |

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| Remember the Balance sheet equation Assets = Liabilities + Owner Equity | | |

| so if assets = $1,400,000 and liabilities are $300,000 then equity is $1,100,000 | |

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| and if total assets are $1,400,000 and include $600,000, then fixed assets are $800,000 | | |

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| Fixed Asset Turnover = Sales / Fixed Assets | | |

| so | 4.0 = | x [sales] / 800,000 | then sales, x = | 3200000 | | | Here we had to use multiple steps. | |

| | | Start with what you need to get ROE. | |

| Return on Sales = | Net Income | / | Sales = | | | You either need Net Income and Equity or | |

| 0.05 | = | x | / | 3200000 | | the information to use Dupont Analysis. | |

| x | = | 160000 | (Net Income) | | Because I had balance sheet information, | |

| I was able to calculate equity. | |

| Return on Equity | = | Net Income | / | Equity | | Then using...