The financial statements for Castile Products, Inc., are given below: Account ba

Question

The financial statements for Castile Products, Inc., are given below:

     Account balances at the beginning of the year were: accounts receivable, $180,000; and inventory, $290,000. All sales were on account. Assets at the beginning of the year totaled $1,090,000, and the stockholders’ equity totaled $635,000.

Compute the following:

Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

The financial statements for Castile Products, Inc., are given below:

Explanation / Answer

1.

Gross Margin percentage = Gross Profit/Sales = $1,050,000/$2,260,000 = 0.4646 = 46.46%

2.

Net profit margin percentage = Net income/Sales = $288,050/$2,260,000 = 0.1275 = 12.75%

3.

Return on Total assets = {Net income + Interest expense*(1-Tax rate)} / Average total assets

Average total assets = ($1,090,000 + $1,440,000)/2 = $1,265,000

Return on total assets = ($288,050 + $38,500*(1-0.30)} / $1,265,000 = $315,000/$1,265,000 = 0.2490 = 24.90%

4.

Return on equity = Net income/Average stockholder’s equity

Average stockholder’s equity = ($635,000 + $880,000)/2 = $757,500

Return on equity = $288,050/$757,500 = 0.3803 = 38.03%

5.

Financial leverage was positive because the rate of return to the common stockholders was greater than the rate of return on total assets.

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