A comapny has a net profit margin of 4 percent and earnings after taxes of $200
ID: 2650869 • Letter: A
Question
A comapny has a net profit margin of 4 percent and earnings after taxes of $200 million. it's current balance sheet is as follows:
Current assets $ 6,000,000,000 current liabilities $ 3,500,000,000
fixed assets $ 10,000,000,000 long term debt $ 8,500,000,000
total assets $ 16,000,000,000 common stock $ 2,000,000,000
Retained Earnings $ 2,000,000,000
total stock holder equity $ 16,000,000,000
(A) Calculate the company return on stockholders equity
(B) Industry average ratios are:
Net profit margin 5%
Total asset turnover 1.6 times
Equity multiplier 1.2 times
Calculate the company ratios: net profit margin, total asset turnover and Equity multiplier, then compare them with the averages of the industry. what do they indicate about the company's strengths and weaknesses?
Explanation / Answer
Ans (A) Return on Equity = Earning after Tax/ Shareholder Equity
= $ 200,000,000/16,000,000,000=1.25%
Ans (B) Asset turnover Ratio= Total Turnover/ Total Asset
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