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Foundations Of Financial Management
Found in: Page 83
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

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Short Answer

In January 2007, the Status Quo Company was formed. Total assets were $544,000, of which $306,000 consisted of depreciable fixed assets. Status

Quo 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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Step by Step Solution

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’).

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