Question

Comparative financial statements for Weller Corporation, a merchandising company, for the year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 810,000 shares of common stock were outstanding. The interest rate on the bonds, which were sold at their face value, was 12%. The income tax rate was 40% and the dividend per share of common stock was $0.40 this year. The market value of the company’s common stock at the end of the year was $18. All of the company’s sales are on account.

Weller Corporation Comparative Balance Sheet (dollars in thousands)
	This Year			Last Year
Assets
Current assets:
Cash	$	2,546		$	2,770
Accounts receivable, net		12,400			9,150
Inventory		9,750			8,240
Prepaid expenses		1,810			2,120
Total current assets		26,506			22,280
Property and equipment:
Land		6,100			6,100
Buildings and equipment, net		19,300			19,100
Total property and equipment		25,400			25,200
Total assets	$	51,906		$	47,480
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	9,600		$	8,350
Accrued liabilities		620			750
Notes payable, short term		310			310
Total current liabilities		10,530			9,410
Long-term liabilities:
Bonds payable		6,250			6,250
Total liabilities		16,780			15,660
Stockholders' equity:
Common stock		810			810
Additional paid-in capital		4,250			4,250
Total paid-in capital		5,060			5,060
Retained earnings		30,066			26,760
Total stockholders' equity		35,126			31,820
Total liabilities and stockholders' equity	$	51,906		$	47,480

Weller Corporation
Comparative Income Statement and Reconciliation
(dollars in thousands)

This Year

Last Year

  Sales

$

80,000

$

75,000

  Cost of goods sold

52,500

48,500

  Gross margin

27,500

26,500

  Selling and administrative expenses:

     Selling expenses

8,600

8,100

     Administrative expenses

12,100

11,100

  Total selling and administrative expenses

20,700

19,200

  Net operating income

6,800

7,300

  Interest expense

750

750

  Net income before taxes

6,050

6,550

  Income taxes

2,420

2,620

  Net income

3,630

3,930

  Dividends to common stockholders

324

648

  Net income added to retained earnings

3,306

3,282

  Beginning retained earnings

26,760

23,478

  Ending retained earnings

$

30,066

$

26,760

Compute the following financial data for this year:

1.	Gross margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

      

2.	Net profit margin percentage. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

        

3.	Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

4.	Return on equity. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

       

Answer 1

Answer 1.

Gross Margin Percentage = Gross Margin / Sales
Gross Margin Percentage = $27,500 / $80,000
Gross Margin Percentage = 34.4%

Answer 2.

Net Profit Margin = Net Income / Sales
Net Profit Margin = $2,420 / $80,000
Net Profit Margin = 3.0%

Answer 3.

Average Total Assets = ($51,906 + $47,480) / 2
Average Total Assets = $49,693

Return on Total Assets = [Net Income + Interest Expense * (1 - tax rate)] / Average Total Assets
Return on Total Assets = [$2,420 + $750 * (1 - 0.40)] / $49,693
Return on Total Assets = $2,870 / $49,693
Return on Total Assets = 5.8%

Answer 4.

Average Stockholders’ Equity = ($35,126 + $31,820) / 2
Average Stockholders’ Equity = $33,473

Return on Equity = Net Income / Average Stockholders’ Equity
Return on Equity = $2,420 / $33,473
Return on Equity = 7.23%