Linda\'s Clothing is a retailer of contemporary women\'s clothing Selected finan
ID: 2583518 • Letter: L
Question
Linda's Clothing is a retailer of contemporary women's clothing Selected financial information for Linda's appears below: 2011 20102009 2008 $978,560|$786,500 $520,6501$245,820 $ 56,759|$ 31,1501$ 15.375 $14.750 S381,500 $246,250 $145,49 S71,268 Net sales Net Income Total Assets at year-end Weighted Average number of shares Outstanding Total Liabilities at year-end Common Stockholders' Equity at year-end $175,533S126,593S 84,968 S53,645 Interest Expense 84,215 80,546 77,965 75,888 205,9679,657 60,5227,623 165 195 258 368 Required a Compute the rate of return on assets for the years 2009-2011. Linda's has an effective tax rate of 35%. b. Compute the rate of return on common shareholders' equity for the years 2009-2011 c. If Linda wants to improve its ROA, propose two scenarios to improve the operation. Provide your analysis with numeric analysis.Explanation / Answer
Total Assets
Return on Assets for 2009 = 15375 + 258(1-.35)
145490
= 10.68%
Return on Assets for 2010 = 31150 + 195(1-.35)
246250
= 12.70%
Return on Assets for 2011 = 56759 + 165(1-.35)
381500
= 14.91%
Shareholder’s Equity
Return on equity for 2009 = 15375 * (1-.35)
84968
= 11.76%
Return on equity for 2010 = 31150 * (1-.35)
126593
= 16.00%
Return on equity for 2011 = 56759 * (1-.35)
175533
= 21.01%
Assets cost can be kept down by monitoring assets expenses monthly. Equipment Cost can be reduced by renting or leasing equipment.
For Example, in 2011 the company has no requirement of an assets valued $ 65000. Therefore company can reduce its assets by disposing it and may lease or rent in the future, if required. After disposing assets valued $ 65000, the total assets are ( 381500-65000)= $ 316500.
Return on Assets for 2011 = 56759 + 165(1-.35)
316500
= 17.97%
Earlier, the ROA was 14.91% but now it is 17.97%. It has been increased by 3% after disposing assets which was not required in the business in the current year.
ROA can be increased by eliminating departments with poor performance records. It will allow the company to devote more money to profitable departments. This will increase the sale of company and reducing of cost as well.
For Example, in 2011 a department having poor performance has been eliminated. Cost for this department was $4800. This money was invested in the best performance department and the sales has been increased by $ 8500. Therefore, Net income is (56759+8500) = $65259
Return on Assets for 2011 = 65259 + 165(1-.35)
381500
= 17.13%
Earlier, the ROA was 14.91% but now it is 17.13%.
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