Question

The Stars Company had net income in 2019 of AED 18 million. Here are some of the financial ratios from the annual report.

Profit Margin = 5%

Return on Assets = 8%

Debt Assets Ration = 45%

Using these ratios, calculate the following for the Sun Company: a) Sales

b) Total assets

c) Total asset turnover

d) Total debt

e) Stockholders' equity

f) Return on equity

2.A firm has sales of AED 500 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is AED 40 million. What is the average collection period?

(Use a 360-day year.)

3.The MCR Corporation has total assets of AED 1,400 million and current assets of AED 600 million. It turns over its fixed assets 4 times a year. It has AED 300 million of debt. Its return on sales is 5 percent. What is its return on stockholders’ equity?

Answer 1

1.a. Sales= Net Income/profit margin = 18m/5% = 360 million

b. Total assets= Net Income/ROA = 18 m/ 8% = 225 million

c. Total assets turnover= Sales/Total assets = 360/225 = 1.6

d. Total debt= 45%*total assets= 45%*225 m = 101.25 million

e. Equity= (1-Debt Assets ratio)*Total assets = (1-45%)*225 m

= 123.75

f. ROE= Net Income/Equity

= 18/123.75

= 14.55%

2. Average collection period= 360*Average receivables/Credit sales

= 360*40/(500*90%)

= 32 days

3.

Fixed assets= Total assets-current assets

= 1400-600= 800 AED million

Sales= Fixed assets*4 = 800*4= 3200 million

Net Income= Return on sales= 5%*3200 = 160 m

Return on Equity= Net Income/Equity

= 160/ (Total assets-Debt)

=160/ (1400-300)

= 14.55%