Requirement 2
The return on
assets
indicates a
company’s
overall
J&J’s
profitability is significantly higher than that of Pfizer.
Rate of return on assets = Net income
Total assets
Problem 4–13 (continued)
Requirement 3
Profitability can be achieved by a high profit margin, high turnover, or a
combination of the two.
Rate of return on assets =Profit margin Asset
on sales
turnover
= Net income Net sales
Net sales Total assets
= 14.9%
= 1.4%
No, the combinations of profit margin and asset turnover are not similar. J&J’s
profit margin is much higher than that of Pfizer, as is its asset turnover. These
differences combine to produce a significantly higher return on assets for J&J.
Problem 4–13 (concluded)
Requirement 4
J&J provided a
much greater
return to
shareholders.
Rate of return on = Net income
shareholders’ equity Shareholders’ equity
Requirement 5
The two
companies have
virtually
identical equity
multipliers,
higher than
their return on assets.
Equity multiplier = Total Assets
shareholders’ equity Shareholders’ equity
Problem 4–14
a. Times interest earned ratio = (Net income + Interest + Taxes) ÷ Interest = 17
(Net income + $2 + 12) ÷ $2 = 17
b. Return on assets = Net income ÷ Total assets = 10%
c. Profit margin on sales = Net income ÷ Sales = 5%
d. Gross profit margin = Gross profit ÷ Sales = 40%
e. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 8
f. Receivables turnover ratio = Sales ÷ Accounts receivable = 20
g. Current ratio = Current assets ÷ Current liabilities = 2.0
Acid-test ratio = Quick assets ÷ Current liabilities = 1.0
Current assets ÷ 2 = Current liabilities
h. Acid-test ratio = (Cash + Accounts receivable) ÷ Current liabilities = 1.0
Problem 4–14 (concluded)
i. Noncurrent assets = Total assets – Current assets
j. Return on shareholders’ equity = Net income ÷ Shareholders’ equity = 20%
k. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.0
CADUX CANDY COMPANY
Balance Sheet
At December 31, 2018
Assets
Current assets:
Cash $ 10
Accounts receivable (net) 20
Liabilities and Shareholders’ Equity
Current liabilities $ 30
Problem 4–15
Requirement 1
The
return on
assets
indicates a
profitability, ignoring specific sources of financing. In this regard, Metropolitan’s
profitability exceeds that of Republic.
Rate of return on assets = Net income
Total assets
Requirement 2
Profitability can be achieved by a high profit margin, high turnover, or a
combination of the two.
Rate of return on assets = Profit margin × Asset
on sales turnover
= Net income ×Net sales
Net sales Total assets
Metropolitan = $ 593.8 ×$5,698.0
Republic = $ 424.6 ×$7,768.2
Republic’s profit margin is much less than that of Metropolitan, but partially
makes up for it with a higher turnover.
Problem 4–15(continued)
Requirement 3
Republic provides a greater return to common shareholders.
Rate of return on = Net income
shareholders’ equity Shareholders’ equity
Requirement 4
When the return on shareholders’ equity is greater than the return on assets,
management is using debt funds to enhance the earnings for stockholders. Both
firms do this. Republic’s higher leverage has been used to provide a higher return
Equity multiplier = Total assets
Shareholders’ equity