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# Chapter_3_-_Moodle_Ready - Chapter 3 Problems 3-A Easter...

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Chapter 3 Problems 3-A. Easter Egg and Poultry Company has \$2,000,000 in assets and \$1,400,000 of debt. It reports net income of \$200,000. a. What is the firm’s return on assets? b . What is its return on stockholders’ equity? c . If the firm has an asset turnover ratio of 2.5 times, what is the profit margin (return on sales)? 3-A. Solution: Easter Egg and Poultry Company a. Net income Return on assets (investment) Total assets \$200,000 10% \$2,000,000 = = S3-1

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b. Net income Return on equity Stockholders' equity Stockholders' equity total assets total debt \$2,000,000 \$1,400,000 \$600,000 Net income \$200,000 33% Stockholders' equity \$600,000 OR Return Return on equity = = - = - = = = = on assets (investment) (1 Debt/Assets) \$1,400,000 Debt/Assets 70% \$2,000,000 10% 10% Return on equity 33% (1 .70) .30 - = = = = - c. Sales total assets total assets turnover \$2,000,000 2.5 \$5,000,000 Net income \$200,000 Profit margin 4% Sales \$5,000,000 = = = = = = S3-2
3-B. Baker Oats had an asset turnover of 1.6 times per year. a. If the return on total assets (investment) was 11.2 percent, what was Baker’s profit margin? b. The following year, on the same level of assets, Baker’s assets turnover declined to 1.4 times and its profit margin was 8 percent. How did the return on total assets change from that of the previous year? 3-B. Solution: Baker Oats a. Total asset turnover × Profit Margin = Return on Total assets 1.6 × ? = 11.2% 11.2% Profit margin = 7.0% 1.6 = b. 1.4 × 8% = 11.2% It did not change at all because the increase in profit margin made up for the decrease in the asset turnover. S3-3

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3-C. Gates Appliances has a return-on-assets (investment) ratio of 8 percent. a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity? b . If the firm had no debt, what would the return-on-equity ratio be? 3-C. Solution: Gates Appliances a. Return on assets (investment) Return on equity (1 Debt/Assets) 8% (1 0.40) 8% 0.60 13.33% = - = - = = b. The same as return on assets (8%). S3-4
3-D. Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation.

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Chapter_3_-_Moodle_Ready - Chapter 3 Problems 3-A Easter...

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