26BP_c

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### Foundations Of Financial Management

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

# In January 2007, the Status Quo Company was formed. Total assets were $544,000, of which$306,000 consisted of depreciable fixed assets. StatusQuo uses straight-line depreciation of $30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been$29,000 per year each of the last 10 years. Other assets have not changed since 2007.c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)

As the income of the company rises, return on assets will be higher than in Part ‘b’ and would indicates an increase in return partially from more profitable operations.

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## Net Income of the company

 Year Net Income 2007 $29,000 2008 31,900(29,000X110%) 2009 35,090(31,900X110%) 2010 38,599(35,090X110%) 2011 42,459(35,599X110%) 2012 46,705(42,459X110%) 2013 51,375(46,705X110%) 2014 56,513(51,375X110%) 2015 62,164(56,513X110%) 2016$68,380(62,164X110%)

## Return on assets for the year ending 2007, 2009, 2012, 2014, and 2016

 Year Net Income (a) Total assets (b) Return on assets (a/b) 2007 $29,000$513,400 5.65% 2009 35,090 452,200 7.76% 2012 46,705 360,400 12.96% 2014 56,513 299,200 18.89% 2016 $68,380$238,000 28.73%

## Comparison of Return on assets computed in part a with part b

 Year Return on asset as per part a Return on assets as per part b 2007 5.65% 5.65% 2009 6.41% 7.76% 2012 8.05% 12.96% 2014 9.69% 18.89% 2016 12.18% 28.73%

This table shows that the rate of increase in the return on assets after the increase in income is more than the increase in return on assets before the increase in income (i.e. in Part ‘a’).