Question

Calculate the Return on Assets (ROA) for the following company results:

	2019
Net Sales	$10,358,000
Net Income*	935,000
Average Total Assets	8,376,000

*Assume there are no non-recurring items or non-controlling interests

6. Net Profit Margin               __________________ /    ____________ = _____________

7. Total Asset Turnover         __________________ /    ____________ = _____________

8. Return on Assets (DuPont) __________________ X ____________ = _____________

9. Compare & Interpret:

a) To answer this question: “If the company expects a ROA of 14%, has the company met its

target based on the results above?”

Complete the following statement:

The actual return on assets of _____ is _____________ than the expected return of ______%

b) Explain what the results above indicate about management’s performance:

Assume Net Profit Margin was planned to be 10.0% and Total Asset Turnover was planned to be 1.4.

                                                          

1. Net Profit Margin:

2. Total Asset Turnover:

_____10. In the formula for return on investment, interest expense is multiplied by (1 - tax rate), then added to net income. Why is this adjustment made?

1. Interest is not tax deductible
2. Net income is after tax; the numerator must be adjusted to represent all long-term providers of capital
3. Net income is after tax; the numerator must be adjusted to represent only short-term providers of capital
4. Debt is excluded from the denominator to represent common shareholders
5. Dividends are not tax deductible

Answer 1

6. Net profit margin = Net income / Total sales

935000 / 10,358,000 = 0.0902 or 9 %

7. Total asset turnover = Sales / Average total assets

10358000 / 8376000 = 1.2366

8. Return on assets (Dupont) = Net income / Average total assets

935000 / 8376000 = 0.1116 or 11.16%

9 a.The actual return on assets of 11.16% is less than the expected return of 14 %

9 b. The management's performance is not as per what they expected. They are slightly lacking on the returns.

1. Net Profit Margin: 9%
2. Total Asset Turnover: 1.23

10. Option B is the correct answer - Net income is after tax; the numerator must be adjusted to represent all long-term providers of capital.

(1-tax rate) is used to get the post tax value.

Whereas 1/(1-tax rate) is used to get the pre tax value.