3-9. Solution:
Network Communications
Total assets $1,500,000
Sales Fixed assets Fixed asset turnover
$2,664,000 $888,000 3
= ´
= ´
Total assets $1,500,000
– Debt 319,000
Net income = Sales Profit margin
= $2,664,000 8% = $213,120
´
´
Net income
Return on stockholders’ equity Stockholders’ equity
$213,120 18.05%
$1,181, 000
=
= =
10. Profitability ratios (LO2) Fondren Machine Tools has total assets of $3,310,000 and
current assets of $879,000. It turns over its fixed assets 3.6 times per year. Its return on
sales is 4.8 percent. It has $1,750,000 of debt. What is its return on stockholders’ equity?
3-10. Solution:
Fondren Machine Tools
Total assets $3,310,000
– Current assets 879,000
11.2%
Profit margin = 7.0%
1.6 =
b. 1.4 × 8% = 11.2%
12. Du Pont system of analysis (LO3) AllState Trucking Co. has the following ratios
compared to its industry for last year.
AllState Trucking Industry
Explain why the return-on-assets ratio is so much more favorable than the return-on-sales
3-12. Solution:
AllState Trucking Company
AllState Trucking Company has a higher asset turnover ratio than
the industry.
15% 10%
vs
3% 8%
AllState’s turnover 5x versus 1.25x Industry turnover
13. Du Pont system of analysis (LO3) Front Beam Lighting Company has the following
ratios compared to its industry for last year.
Front Beam
Lighting Industry
Explain why the return-on-equity ratio is so much less favorable than the return-on-assets
3-13. Solution:
Front Beam Lighting Company
Front Beam has a lower debt-to-total-assets ratio than the
industry.
14. Du Pont system of analysis (LO3) Gates Appliances has a return-on-assets (investment)
ratio of 8 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
b. If the firm had no debt, what would the return-on-equity ratio be?
3-14. Solution:
Gates Appliances
a.
Return on assets (investment)
Return on equity (1 Debt/Assets)
8%
(1 0.40)
8%
0.60
13.33%
=–
=–
=
=
b. The same as return on assets (8%).
15. Du Pont system of analysis (LO3) Using the Du Pont method, evaluate the effects of the
following relationships for the Butters Corporation:
a. Butters Corporation has a profit margin of 7 percent and its return on assets
(investment) is 25.2 percent. What is its assets turnover?
b. If the Butters Corporation has a debt-to-total-assets ratio of 50 percent, what would the
firm’s return on equity be?
c. What would happen to return on equity if the debt-to-total-assets ratio decreased to
35 percent?
3-15. Solution:
Butters Corporation
a.
Profit margin Total asset turnover Return on asset (investment)
7% ? 25.2%
25.2%
Total asset turnover 7%
3.6x
´ =
´ =
=
=
b.
Return on assets (investment)
Return on equity (1 Debt/Assets)
25.2%
(1 0.50)
25.2%
0.50
50.40%
=–
=–
=
=
3-15. (Continued)
c.
Return on assets (investment)
Return on equity (1 Debt/Assets)
25.2%
(1 .35)
25.2%
0.65
38.77%
=–
=–
=
=
16. Du Pont system of analysis (LO3) Jerry Rice and Grain Stores has $4,780,000 in yearly
sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.7 times
per year. It has $123,000 in current liabilities and $349,000 in long-term liabilities.
a. What is its return on stockholders’ equity?
b. If the asset base remains the same as computed in part a, but total asset turnover goes
up to 3, what will be the new return on stockholders’ equity? Assume that the profit
margin stays the same as do current and long-term liabilities.
3-16. Solution:
Jerry Rice and Grain Stores
a.
Net income Sales profit margin
$4,780,000 4.5%
$215,100
Stockholders’ equity Total assets Total liabilities
Total assets Sales/Total asset turnover
$4,780,000/2.7
$1,770,370.37
Total liabilities Current
= ´
= ´
=
= –
=
=
=
=liabilities Long-term liabilities
$123,000 $349,000
$472,000
+
= +
=
Stockholders’ equity $1,770,370.37 $472,000 $1,298,370.37= – =
Net income
Return on stockholders’ equity Stockholders’ equity
$215,100 16.57%
$1, 298,370.37
=
= =
3-16. (Continued)
b. The new level of sales will be:
Sales Total assets Total asset turnover
$1,770,370.37 3
$5,311,111.11
= ´
= ´
=
Net income
Return on stockholders’ equity Stockholders’ equity
$239,000 18.41%
$1, 298,370.37
=
= =
17. Interpreting results from the Du Pont system of analysis (LO3) Assume the following
data for Cable Corporation and Multi-Media Inc.
Cable Multi-
Corporation Media Inc.
Net income……………..…..….…... $ 31,200 $ 140,000
Sales…………………….….….….….. 317,000 2,700,000
Total assets……………….….….….. 402,000 965,000
Total debt…………………………….. 163,000 542,000
Stockholders’ equity……………… 239,000 423,000
a. Compute the return on stockholders’ equity for both firms using ratio 3a. Which firm
has the higher return?
b. Compute the following additional ratios for both firms:
Net income/Sales
Net income/Total assets
Sales/Total assets
Debt/Total assets
c. Discuss the factors from part b that added or detracted from one firm having a higher
return on stockholders’ equity than the other firm as computed in part a.
3.17. Solution:
Cable Corporation and Multi-Media Inc.
a. Cable Multi-
Corporation Media Inc.
Net income $31, 200 $140,000
13.05% 33.1%
Stockholders’ equity $239,000 $423,000
= = =
3-17. (Continued)
b. Cable Multi-
Corporation Media Inc.
Net income $31, 200 $140,000
9.84% 5.19%
Sales $317,000 $2,700,000
Net income $31, 200 $140,000
7.76% 14.51%
Total assets $402, 000 $965, 000
Sales $317,000 $2,700,000
.79x 2.8x
Total assets $402,000 $965,000
Debt
Total
= = =
= = =
= = =
$163,000 $542,000
40.55% 56.17%
assets $402,000 $965,000
= = =
c. As previously indicated, Multi-Media Inc. has a substantially
higher return on stockholders’ equity than Cable Corporation
However, Multi-Media Inc. has a higher return than Cable
Corporation on total assets (14.51 percent versus 7.76
Multi-Media Inc.’s superior return on stockholders’ equity is
3-17. (Continued)
Although not requested in the question, one could show the
following:
Net income Net income / Total assets
Stockholders’ equity (1 Debt/Assets)
=–
33.1%
13.05%
18. Average collection period (LO2) A firm has sales of $3 million, and 10 percent of the
sales are for cash. The year-end accounts receivable balance is $285,000. What is the
average collection period? (Use a 360-day year.)
3-18. Solution:
Accounts receivable
Average collection period Average daily credit sales
($3,000,000 90%)
$285,000 / 360 days
$285,000
$7,500 per day
38 days
=
´
=
=
=
19. Average daily sales (LO2) Martin Electronics has an accounts receivable turnover equal to
3.19. Solution:
Martin Electronics
Credit sales
Average daily credit sales 360
=
To determine credit sales, multiply accounts receivable by
accounts receivable turnover.
$80,000 15 $1,200,000´ =
$1,200,000
Average daily credit sales $3,333
360
= =
20. Inventory turnover (LO2) Perez Corporation has the following financial data for the years
20X1 and 20X2:
20X1 20X2
Sales………………………… $8,000,000 $10,000,000
Cost of goods sold…………… 6,000,000 9,000,000
Inventory…………………….. 800,000 1,000,000
a. Compute inventory turnover based on ratio number 6, Sales/Inventory, for each year.
b. Compute inventory turnover based on an alternative calculation that is used by many
financial analysts, Cost of goods sold/Inventory, for each year.
c. What conclusions can you draw from part a and part b?