Exercise 15-5 Financial Ratios for Assessing Profitability [LO15-5] Comparative

Question

Exercise 15-5 Financial Ratios for Assessing Profitability [LO15-5] Comparative financial statements for Weller Corporation, a merchandising company, for the fiscal year ending December 31 appear below. The company did not issue any new common stock during the year. A total of 820,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.40. The market value of the company's common stock at the end of the year was $19.00. All of the company's sales are on account.

Explanation / Answer

(1) Gross margin = Gross profit / Sales = $28,000 / $81,000 = 0.3457, or 34.57%

(2) Net margin = Net income / Sales = $3,720 / $81,000 = 0.0459 = 4.59%

(3) Return on total asset = Net income / Average total asset

= $3,720 / [$(53,532 + 49,000) / 2] = $3,720 / $51,266 = 0.0726 = 7.26%

(4) Return on equity = Net income / Average stockholder equity

= $3,720 / [$(35,372 + 31,980) / 2] = $3,720 / $33,676 = 0.1105, or 11.05%

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