Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity
With the Du Pont system of analysis, the return on assets is calculated by multiplying the net profit margin with the total assets turnover. And the return on the stockholder’s equity is calculated by multiplying the return on the asset with the equity multiplier.
The Du Pont analysis breaks down the equation of Return on Equity (ROE) into three parts:
The Lancaster Corporation’s income statement is given below.
a. What is the times-interest-earned ratio?
Cost of goods sold
Fixed charges (other than interest)
Income before interest and taxes
Income before taxes
Income after taxes
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.
b. If the asset base remains the same as computed in part a, but 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
The balance sheet for Stud Clothiers is shown below. Sales for the year were $2,400,000, with 90 percent of sales sold on credit.
Balance sheet 20X1
Liabilities and Equity
Bonds payable (long term)
Plant and equipment
Paid in capital
Total LIbilities and Equity
Compute the following:
c. Debt to total assets ratio.
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
Plant and equipment (gross)
Less: accumulated depreciation
Net plant and equipment
Paid in capital
Total liabilities and stockholder’s equity
Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.
$2,500 in preferred stock dividends were paid, and $5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were
unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $40,000. Accounts payable increased by 20 percent. Notes payable increased by $6,500 and bonds payable decreased by $12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.
a. Prepare an income statement for 20X2.
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