Mgmt_200_Fall_2006_Exam_2(2,21)

# Mgmt_200_Fall_2006_Exam_2(2,21) - Name PUID Purdue...

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Name: ________________________ PUID: ________________________ Purdue University Krannert School of Management MGMT 200 – Introductory Financial Accounting Fall 2006 Exam 2 – October 25, 2006 This exam consists of 4 questions on 10 pages (excluding this cover page) for a total of 100 points. Time allowed: 90 minutes. Answer all questions. To ensure full credit and to maximize partial credit, clearly show all supporting calculations. The exam is closed book. A calculator is permitted. GOOD LUCK . Question 1 (24 points) ________ Question 2 (28 points) ________ Question 3 (24 points) ________ Question 4 (24 points) ________ TOTAL (100 points) ________

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Question 1. Return on Equity (24 points) Robertson Corporation announced the following results for the year ended December 31, 2005: 2004 2005 Sales \$285,600 \$510,840 Gross Profit 91,392 178,794 Net income 22,848 25,542 As at December 31, 2003 2004 2005 Total liabilities 87,130 88,870 117,530 Total stockholders’ equity 77,570 82,430 89,570 Required: a. For each year (2004 and 2005) compute the Return on Equity (ROE) and provide a decomposition of the return on equity into its three component ratios: Net profit margin, total asset turnover, and the financial leverage ratio. ROE = Net Profit Margin Asset turnover Financial Leverage 2004: ____________ = ___________ x ___________ x ___________ 2005: ____________ = ___________ x ___________ x ___________ Workings: Question 1 continued over . . . Mgmt 200 – Exam 2 – Fall 2006 – page 1
Question 1 continued b. The CEO of Robertson Corporation introduced a new low price strategy in early 2005 and states that the new strategy is highly successful as the sales grew from \$285,600 in 2004 to \$510,840 in 2005, an increase of 78.9%. Based on your analysis of the Return on Equity, do you agree with the CEO that the new strategy was highly successful? Explain.

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