The tollowing shows Sixty-Second Avenue Inc.\'s income statement for the last tw
ID: 2335369 • Letter: T
Question
The tollowing shows Sixty-Second Avenue Inc.'s income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year Sixty-Second Avenue Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,500 1,365 1,268 180 1,448 4,064 3,052 244 3,658 2,808 1,123 2,195 1,685 Net Sales 5,715 Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net Income 286 1,651 406 1,463 Calculate the profitability ratios of Sixty-Second Avenue Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 67.82% Operating margin Profit margin Return on total assets Return on common equity Basic earning power 38.41% 15.93% | 29.96% 24.03%Explanation / Answer
Answers
Ratio
Value
Year 2
Year 1
Operating Margin
71.11%
67.82%
Profit margin
34.41%
37.44%
Return on total Assets
12.98%
15.93%
Return on common Equity
39.02%
29.96%
Basic earning power
24.03%
28.86%
Calculations
Ratio
Value
Year 2
Year 1
Operating Margin
(4064/5715)*100
67.82%
Profit margin
34.41%
(1685/4500)*100
Return on total Assets
(2195/16916)*100
15.93%
Return on common Equity
(2195/5625)*100
29.96%
Basic earning power
24.03%
(3052/10575)*100
Formula for basic earning power= EBIT/Total assets
Formula for Operating margin= Operating Profit/Sales
Formula for Profit margin= net Income/Sales
Return on total Assets= Net Income/ Total assets
Return on common equity= Net income/Total common equity.
Note
It is given that all earnings are distributed as dividends. This means the balance of Equity has not changed in year 2 because same amount is added to equity as income and then deducted as dividends.
Answers
Ratio
Value
Year 2
Year 1
Operating Margin
71.11%
67.82%
Profit margin
34.41%
37.44%
Return on total Assets
12.98%
15.93%
Return on common Equity
39.02%
29.96%
Basic earning power
24.03%
28.86%
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