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AFM 101 Solutions - Week of Nov 28th

# AFM 101 Solutions - Week of Nov 28th - P13-4 Req 1 Name and...

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P13-4 Req. 1 Name and Computation of the 2012 Ratio Brief Explanation of the Ratio Tests of profitability: (1) Return on equity: \$27,000 ÷ \$109,000* = 24.77 %. *(\$102,000 + \$116,000) ÷ 2 = \$109,000 Measures the return earned for shareholders based upon their investment (including retained earnings) in the business. (2) Return on assets: (\$27,000 + \$4,830*) ÷ \$188,000†= 16.93 %. Measures the entity’s performance in using total resources (total assets) available to it. *Interest: \$70,000 x 10% x .69 = \$4,830 (Tax rate: \$12,000 ÷ \$39,000 = 31%) (\$172,000 + \$204,000) ÷ 2 = \$188,000 (3) Financial leverage percentage: 24.77% – 16.93% = 7.84 % positive The advantage to be gained by shareholders when the interest rate (net of tax) is less than the return on assets. (4) Earnings per share \$27,000 ÷ 20,000 shares = \$1.35 Measures the return earned on each common share outstanding. (5) Profit margin \$27,000 ÷ \$480,000 = .056 (or 5.6 %) Indicates the portion of each sales dollar that is earned as profit. (6) Fixed asset turnover \$480,000 ÷ [(\$120,000 + 130,000)/2] = 3.84 An indication of how efficiently management is using fixed assets.

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P13-4 (continued) Req. 1 (continued) Name and Computation of the 2012 Ratio Brief Explanation of the Ratio Tests of liquidity: (1) Cash ratio \$6,800 ÷ \$18,000 = .38
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