Question

Jerry Rice and Grain Stores has $4,880,000 in yearly sales. The firm earns 3 percent on each dollar of sales and turns over its assets 2.8 times per year. It has $196,000 in current liabilities and $359,000 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.)

  

Return on stockholders' equity

%

  

b.

If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.40, 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.)

Answer 1

Net Income = 3% * $4,880,000 = 146,400

Asset turnover ratio = Sales / Total Assets = 2.8, hence, total assets = 4,880,000 / 2.8 = 1,742,857.14

Total Equity = Total Assets - Current Liabilities - Non current liabilities

= 1,742,857.14 - 196,000 - 359,000 = 1,187,857.14

a. Return on Stockholder's equity = Net Assets / Total Equity = 146,400 / 1,187,857.14 = 12.32%

b. total asset turnover goes up to 3.40

Now,

Total Assets = 4,880,000 / 3.4

Total Equity = 1,435,294.12 - 196,000 - 359,000 = 880,294.12

Return on Stockholder's equity = Net Assets / Total Equity = 146,400 / 880,294.12 = 16.63%