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Foundations Of Financial Management
Found in: Page 80
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Assume the following data for Cable Corporation and Multi-Media Inc.

Capable corporation

Muli-media inc

Net income

$31,200

$140,000

Sales

317,000

2,700,000

Total assets

402,000

965,000

Total debts

163,000

542,000

Stockholder’s equity

239,000

423,000

c. Discuss the factors from part b that added or detracted from one firm

having a higher return on stockholders’ equity than the other firm as

computed in part a.

The return on stockholder’s equity of Multimedia Incorporation is more than that of Cable corporation because the return on the sales of Capable corporation has a higher return than Multimedia Incorporation (9.84% vs. 5.19%).

However, Multimedia Incorporation has a higher return than Capable corporation on total assets (14.51% versus 7.76%) because the total asset turnover of Multimedia Incorporation is more than that of the Cable Corporation (279.79% versus 78.86%). This factor alone leads to a higher return on total assets.

See the step by step solution

Step by Step Solution

Comparison of return on stockholder’s equity from part a

Capable corporation

Multimedia Incorporation

Return on stockholder’s Equity

13.05%

33.10%

Return on stockholder’s equity of multimedia Incorporation is more than that of Capable corporation because the net income of multimedia incorporation is more than that of Capable corporation.

Comparison of other variables from part b

Capable corporation

Multimedia Incorporation

Net income to sales

9.84%

5.19%

Net Income to total assets

7.76%

14.51%

Sales to total assets

78.86%

279.79%

Net income to sales of Multimedia incorporation is less than that of Capable corporation due to the increase in the sale of Multimedia incorporation.

Net income to total assets of multimedia incorporation is more than that of Capable corporation because the total assets of Multimedia incorporation are more than that of Capable corporation.

In addition, sales to total assets of Multimedia incorporation are more than that of Capable corporation because the net sales of Multimedia incorporation are more than that of Capable corporation.

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