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Jerry Rice and Grain Stores has $4,430,000 in yearly sales. The firm earns 2 percent on...

Jerry Rice and Grain Stores has $4,430,000 in yearly sales. The firm earns 2 percent on each dollar of sales and turns over its assets 4.5 times per year. It has $167,000 in current liabilities and $342,000 in long-term liabilities.   

a. What is its return on stockholders’ equity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.75, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

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Answer #1

Sales = 4,430,000

Net profit margin = 2%

Asset turnover = 4.5 times = Sales/Assets

Assets = Sales/ Asset turnover = (4,430,000/4.5) = $ 984,444.44

Total liabilities = Current liabilities + Long term liabilities = 167,000 + 342,000 = $ 509,000

Equity = Total Assets - Total liabilities =984,444.44 - 509,000 = $ 475,444.44

Leverage = Assets/ Equity =  (984,444.44/475,444. 44)

a)

Return on Equity, ROE using Dupont = Net profit margin * Asset turnover * Leverage

= 2% * 4.5 *  (984,444.44/475,444. 44) = 18.63%

b)

Total asset turnover = 4.75 times

ROE = 2% * 4.75 * (984,444.44/475,444. 44) = 19.67%

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