Mgmt_200_Fall_2006_Exam_2_Solution(2,21)

# Mgmt_200_Fall_2006_Exam_2_Solution(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 - SOLUTION 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: ___ 0.2856 ___ = ___ 0.0800 ___ x ___ 1.7000 ___ x ___ 2.1000 ___ 2005: ___ 0.2970 ___ = ___ 0.0500 ___ x ___ 2.7000 ___ x ___ 2.2000 ___ Workings: 2004: 22,848/80,000 = (22,848 / 285,600) x (285,600 / 168,000) x (168,000 / 80,000) 2005: 25,542/86,000 = (25,542/ 510,840) x (510,840 / 189,200) x (189,200 / 86,000) Question 1 continued over . . . Mgmt 200 – Exam 2 Solution – 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. There has been little change in ROE. Sales are up but as expected, the

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Mgmt_200_Fall_2006_Exam_2_Solution(2,21) - Name PUID Purdue...

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