Accounting Chapter 9 Homework The return on total assets and the return on stockholders’ equity are above the industry average for all five years

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P9–5, Continued

1. b.

Return on Stockholders’ Equity = Equity rs’Stockholde Total Average

IncomeNet

Year 5:

$5,400,000

$1,785,000 = 33.1% Year 2: $2,650,000

$768,800 = 29.0%

Critelli return on stockholders’ equity

Industry return on stockholders’ equity

287

P9–5, Continued

1. c.

5.0

6.0

7.0

8.0

Times Interest

Earned = Expense Interest

Expense Interest+ExpenseTax Income+Income Net

Year 5:

$400,000

$2,800,000 = 7.0 Year 2: $240,000

$1,080,000 = 4.5

288

P9–5, Concluded

2. The return on total assets and the return on stockholders’ equity are above

the industry average for all five years. The return on total assets is improving

gradually. The return on stockholders’ equity exceeds the return on total

assets, providing evidence of the positive use of leverage.

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CASES

Case 9–1

This position does not allow the shareholders to take advantage of leverage. As a

result, the return on shareholders’ equity cannot be improved by using debt. In

contrast, a low or no debt load does provide the company great flexibility in the

case of a national calamity. However, the “no debt” position only makes sense

within the “national calamity” scenario. Within normal business operations, most

Case 9–2

Kim is concerned about the inventory and accounts receivable levels because

she must determine their value. Inventory that cannot be sold (or must be sold at

a large discount) or accounts receivable that cannot be collected must be written

down to reflect their reduced value. Kim has conducted the ratio analysis and

interviewed Brad to help make this determination. The inventory and accounts

receivable levels have grown alarmingly. Brad’s response to Kim is not

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Case 9–3

APPLE AND BEST BUY

Common-Sized Statements

Apple Best Buy

Sales ………………………………………………….. 100.0% 100.0%

Cost of sales ………………………………………. (61.5) (76.0)

Gross profit ………………………………………… 38.5 24.0

The common-sized analysis indicates Apple and Best Buy are very different

companies. Apple’s income from operations was 26.8% of sales, and Best Buy’s

was 4.7% of sales. There is a 22.1 percentage point difference between the two

companies.

The gross profit for Apple was 38.5% of sales. In contrast, Best Buy had a gross

profit of 24.0% of sales, which is 14.5 percentage points fewer than Apple. This

suggests Apple is able to charge higher prices than Best Buy for its products.

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Case 9–4

1. a. Return on Total Assets = AssetsTotal Average

Expense Interest + Income Net

b. Return on Stockholders’ Equity = Equity rs’Stockholde Total Average

IncomeNet

Year 3:

$523

$1,882 = 27.8%

Year 2:

$692

$1,880 = 36.8%

Year 1:

$752

$2,374 = 31.7%

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Case 9–4, Continued

d. Dividend Yield = Dividend per Share of Common Stock

Market Price per Share of Common Stock

Year 3:

$1.46

$50.88 = 2.9%

e. Price-Earnings Ratio = Stock Common of Share per Earnings

Stock Common of Share per PriceMarket

Year 3:

$50.88

$3.02 = 16.8

2.

Average Total Assets –– Average Total Stockholders’ Equit

y

Debt Ratio = Average Total Assets

Year 3: $9,931-– $1,882

$9,931 = 81.0%

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Case 9–4, Concluded

Ratio of Liabilities to

Stockholders’ Equity = Average Liabilities

Average Stockholders’ Equity =

Year 1:

$9,760 ––$2,374

$2,374 = 3.1

3. Harley-Davidson’s profitability, as measured by earnings per share, has fluc-

tuated from $3.69 in Year 1 to $3.82 in Year 2 and to $3.02 in Year 3. Its return

on total assets decreased between years, from 7.8% in Year 1 to 7.3% in Year 2

and 5.6% in Year 3. However, its return on stockholders’ equity fluctuated from

31.7% in Year 1 to 36.8% in Year 2 to 27.8% in Year 3. Harley-Davidson’s debt

ratio increased from 75.7% in Year 1 to 81.0% in Year 3. The use of debt as a

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Case 9–5

1. a. Return on Total Assets = AssetsTotal Average

Expense Interest + Income Net

Starwood:

$489 + $111

$8,464 = 7.1%

Marriott:

$1,907 + $340

$23,771 = 9.5%

b. Return on Stockholders’ Equity = Equity rs’Stockholde Total Average

IncomeNet

Starwood:

$489

$1,414 = 34.6%

Marriott:

$1,907

$2,904 = 65.7%

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Case 9–5, Concluded

e. Ratio of Liabilities to Stockholders’ Equity = Total Liabilities

Total Stockholders’ Equity

Starwood:

$6,969

$1,299 = 5.4

Marriott:

$21,471

$2,225 = 9.6

2. Marriott has a higher return on total assets (9.5% vs. 7.1%), and Marriott has

almost double the return on stockholders’ equity than Starwood (65.7% vs.

34.6%). This is because Marriott finances more of its operations using debt,