GROUP 3 - Analysis
Section - K82
Members: Lance G. Alcaraz, Ignacio Larrazabal, John Andrew A. Seroma, Bernice Manalad,
Angel Mae
1. Jerry Rice and Grain Stores has $4,780,000 in yearly sales. The firm earns 4.5 percent
on each dollar of sales and turns over its assets 2.7 times per year. It has $123,000 in
current liabilities and $349,000 in long-term liabilities.
a. What is its return on stockholders' equity?
i. Given:
1. Sales: 4,780,000
2. NPM: 0.045
3. Asset Turnover Ratio: 2.7
4. Liabilities: 123,000 and 349,000
ii. Formula: Net Income / Common Equity = Return on Stockholder’s Equity
1. Net Income = 4,780,000 X .045 = 215,100
iii. Sales / Total Asset = Total Asset Turnover Ratio
1. 123,000 + 349,000 = Total Liabilities = 472,000
2. Total Assets = 4,780,000 / 2.7 = 1,770,370
iv. Total Assets - Total Liabilities = Stockholder’s Equity
1. 1,770,370 - 472,000 = 1,298,370
2. 215,100 / 1,298,370 = 0.1657 or 16.57%
v. Final Answer: The return on stockholder’s equity is approximately 16.57%
. This means each dollar invested earns around 16.57 cents.
b. If the asset base remains the same as computed in part a, but the total asset
turnover goes up to 3, what will be the new return on stockholders' equity?
Assume that the profit margin stays the same, as do current and long-term
Liabilities.
i. New Given
1. Sales: 1,770,370 X 3 = 5,311,110
2. Total Liabilities = 472,000
3. Total Assets = 1,770,370
4. NPM: 0.045
5. Asset Turnover Ratio: 3.0
6. Liabilities: 123,000 and 349,000
ii. Stockholder’s Equity = Total Assets - Total Liabilities
1. 1,770,370 - 472,000 = 1,298,370
iii. Net Income = Sales x Profit Margin
1. Net Income = 5,311,110 X 0.045 = 238999.95 or 239,000
iv. Return on Stockholder’s Equity = Net Income / Shareholder’s Equity
1. Return on Stockholder’s Equity = 239,000 / 1,298,370 = 18.41%
v. Final Answer: The new return on stockholder’s equity is approximately
18.41% each dollar invested earns around 18.41 cents.
2. Baker Oats had an asset turnover of 1.9 times per year.
a. If the return on total assets (investment) was 10.6 percent, what was Baker's
profit margin?
i. Given
1. Total Asset Turnover: 1.9.
2. Return on Total Assets: 10.6%
3. Required: Operating Profit Margin
ii. Formula: Profit Margin = Net Income / Sales
1. Net Income = Return on Total Assets * Total Assets
2. Asset Turnover = Sales / Total Assets
a. Total Assets = Sales / Asset Turnover
b. Total Assets = Net Income / Return on Total Assets / Asset
Turnover
3. Profit Margin = Net Income / Sales = (Return on Total Assets *
Total Assets) / Sales
4. Profit Margin = (Return on Total Assets * Total Assets)/Sales
/Return on Total Assets/ Asset Turnover
5. Profit Margin = (Return on Total Assets * Sales) / Asset Turnover /
Sales
6. Profit Margin = Return on Total Assets / Asset Turnover
iii. Substitution
1. Profit Margin = 10.6 / 1.9 = 5.58%
iv. Final Answer: The profit margin of Baker Oats is 5.58%. Meaning, every
Dollar/Peso in sales earns 5.58 centavos.
b. The following year, on the same level of assets, Baker's asset turnover increased
to 2 times and its profit margin was 5.3 percent. How did the return on total
assets change from that of the previous year?
i. Given
1. Total Asset Turnover: 2.
2. Profit Margin: 5.3
3. Required: Return on Total Assets
ii. Formula: Return on Total Assets = Profit Margin * Asset Turnover
iii. Substitution: Return on Total Assets = 5.3 * 2 = 10.6%
iv. Final Answer: In the following year, the return on total assets of Baker
Oats is 10.6%. Meaning, every dollar/peso invested in assets earns 10.6
centavos.
