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1) Barnes Appliances had net sales for $10 million dollars, net earnings for $450,000 dollars, total assets for $4 million dollars and total equity for $2 million dollars
1) Barnes Appliances had net sales for $10 million dollars, net earnings for $450,000 dollars, total assets for $4 million dollars and total equity for $2 million dollars. With this information answer the next questions:
a) What is the profit margin?
b) What is the return on assets?
c) What is the return on equity?
d) At the present time, the debt to assets ratio is 50%. If this changes to 60%, ¿What is the new return on equity? To answer this question, use the DuPont formula.
Expert Solution
a.Computation of Profit Margin:
Profit Margin = Net Income / Net Sales
= $450,000 / $10,000,000
Profit Margin = 0.045 or 4.5%
b.Computation of Return on Assets:
Return on Assets = Net Income / Average Total Assets
= $450,000 / $4,000,000
Return on Assets = 0.1125 or 11.25%
c. Computation of Return on Equity:
Return on Equity = Net Income / Average Stockholders Equity
= $450,000 / $2,000,000
Return on Equity = 0.225 or 22.5%
d. Computation of New Return on Equity:
Debt to Asset Ratio = Total Debt / Total Assets
50% = Total Debt / 4,000,000
Total Debt = $2,000,000
If Debt to Asset Ratio increases to 60%. Then,
Total Debt = $2,400,000
Therefore, New Equity = Total Assets - Total Debt = $4,000,000 - $2,400,000 = $1,600,000
Return on Equity = $450,000 / $1,600,000 = 0.2813 or 28.13%
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