Question

Return Ratios and Leverage

The following selected data are taken from the financial statements of Cedar Industries:

Sales revenue		$642,000
Cost of goods sold		365,000
Gross profit		$277,000
Selling and administrative expense		100,000
Operating income		$177,000
Interest expense		50,000
Income before tax		$127,000
Income tax expense (40%)		50,800
Net income		$76,200
Accounts payable		$45,000
Accrued liabilities		70,000
Income taxes payable		10,000
Interest payable		25,000
Short-term loans payable		150,000
Total current liabilities		$300,000
Long-term bonds payable		$500,000
Preferred stock, 10%, $100 par		$250,000
Common stock, no par		600,000
Retained earnings		350,000
Total stockholders' equity		$1,200,000
Total liabilities and stockholders' equity		$2,000,000

Required:

1. Compute the following ratios for Cedar Industries:

1. Return on sales
2. Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.)
3. Return on assets
4. Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)

When computing percentage amounts, carry out calculations to four decimal places, but enter your answers to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86.

a. Return on sales		%
b. Asset turnover (round to 2 decimal places)		times
c. Return on assets		%
d. Return on common stockholders' equity		%

Answer 1

1.

Return on sales => Operating profits/Sales revenue*100

ie., 177,000/642,000*100 = 27.57%

2.

Asset turnover = net sales or revenue / average total assets

ie., 642000/ [(2,000,000 + 1,600,000)/2]= 0.36

3. Return on assets = Net Income/Total average assets

ie 76,200/[(2,000,000 + 1,600,000)/2] * 100 = 4.23%

4. Return on common stockholder's equity = Net income (after pref. dividend)/ total average equity

Net income => 76200 - (250000*10%) =51200

Average equity => (Opening equity+ closing equity)/2

ie., =[ {950000-(76200 - 250000*10%)} + 950,000]/2 => 924500

So Return on common shareholders equity => 51200/924500*100 = 5.54%