Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	24,000
Accounts receivable, net					170,000
Merchandise inventory					310,000
Prepaid expenses					7,000
Total current assets					511,000
Property and equipment, net					900,000
Total assets				$	1,411,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	280,000
Bonds payable, 11%					340,000
Total liabilities					620,000
Stockholders’ equity:
Common stock, $10 par value				$	170,000
Retained earnings					621,000
Total stockholders’ equity					791,000
Total liabilities and stockholders' equity				$	1,411,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,250,000
Cost of goods sold		1,250,000
Gross margin		1,000,000
Selling and administrative expenses		630,000
Net operating income		370,000
Interest expense		37,400
Net income before taxes		332,600
Income taxes (30%)		99,780
Net income	$	232,820

     Account balances at the beginning of the year were: accounts receivable, $220,000; and inventory, $330,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $715,000.

Required:

Compute the following:

1.	Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

      

2.	Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

        

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 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

5.

Was financial leverage positive or negative for the year?

	Positive
	Negative

Answer 1

(1) – Gross Margin Percentage

Gross Margin = [Gross margin / Sales] x 100

= [$10,00,000 / 22,50,000] x 100

= 44.44%

(2) – Net Profit Margin Percentage

Profit Margin = [Net Income / Sales] x 100

= [$232,820 / 22,50,000] x 100

= 10%

(3) - Return on Total Assets

Return on Total Assets = Net Income + Interest[1 – tax Rate] / Average Total Assets

= {$232,820 + 37,400[1 - 0.40] } / [ ($14,11,000 + 10,70,000)/2] 100

= [$259,000 / 12,40,500] x 100

= 20.9%

(4) - Return on Equity

Return on Equity = [Net Income / Average Stockholder’s Equity] x 100

= [ $232,820 / {($791,000 + 715,000)/2] x 100

= [$232,820 / 753,000] x 100

= 30.9%

(5) – POSITIVE. Financial leverage Positive since the Return on Equity[30.9%] is greater than the Return on Total Assets[20.9%]