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Homework help 4 - Chapter 3 Problems 1 Dental Delights has...

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Chapter 3 Problems 1. Dental Delights has two divisions. Division A has a profit of $200,000 on sales of $4,000,000. Division B is only able to make $30,000 on sales of $480,000. Based on the profit margins (returns on sales), which division is superior? 3-1. Solution: Dental Delights Division A Division B Net Income $200,000 $30,000 5% 6.25% Sales 4,000,000 $480,000 = = Division B is superior 3. Bass Chemical, Inc., is considering expanding into a new product line. Assets to support this expansion will cost $1,200,000. Bass estimates that it can generate $2 million in annual sales, with a 5 percent profit margin. What would net income and return on assets (investment) be for the year? 3-3. Solution:Bass Chemical, Inc. Net income Sales profit margin $2,000,000 0.05 $100,000 Net income Return on assets (investment) Total assets $100,000 $1,200,000 8.33% = × = × = = = = S3-1
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4. Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of $750,000. It will turn over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year? 3-4. Solution: Franklin Mint and Candy Shop Net income Sales Profit Margin $750,000 0.06 $45,000 Sales Assets Total asset turnover $750,000 2.5 $300,000 Net income Return on assets (invesment) Total assets $45,000 $300,000 15% = × = × = = = = = = = S3-2
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8. Sharpe Razor Company has total assets of $2,500,000 and current assets of $1,000,000. It turns over its fixed assets 5 times a year and has $700,000 of debt. Its return on sales is 3 percent. What is Sharpe’s return on stockholders’ equity? 3-8. Solution: Sharpe Razor Company total assets $2,500,000 – current assets 1,000,000 Fixed assets $1,500,000 Sales Fixed assets Fixed asset turnover $1,500,000 5 $7,500,000 = × = × = total assets $2,500,000 –debt 700,000 Stockholders’ equity $1,800,000 Net income = Sales profit margin = $7,500,000 3% = $225,000 × × Net income Return on stockholders' equity Stockholders' equity $225,000 12.5% $1,800,000 = = = S3-3
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11. Acme Transportation Company has the following ratios compared to its industry for 2009. Acme Transportation Industry Return on assets…………… 9% 6% Return on equity…………… 12% 24% Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to the industry. No numbers are necessary; a one-sentence answer is all that is required. 3-11. Solution: Acme Transportation Company Acme Transportation has a lower debt/total assets ratio than the industry. For those who did a calculation, Acme’s debt to assets were 25% vs 75% for the industry.
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