Jerry Rice and Grain Stores has $4,270,000 in yearly sales. The firm earns 4 per
ID: 2728443 • Letter: J
Question
Jerry Rice and Grain Stores has $4,270,000 in yearly sales. The firm earns 4 percent on each dollar of sales and turns over its assets 3 times per year. It has $102,000 in current liabilities and $396,000 in long-term liabilities.
What is its return on stockholders’ equity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.60, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Jerry Rice and Grain Stores has $4,270,000 in yearly sales. The firm earns 4 percent on each dollar of sales and turns over its assets 3 times per year. It has $102,000 in current liabilities and $396,000 in long-term liabilities.
Explanation / Answer
Answer:a Net income=Sales*profit margin
=$4,270,000*4%
=$170800
Stockholders equity=Total assets- Total liabilities
Total assets=Sales/Total asset turnover
=$4,270,000/3
=$1,423,333.33
Total liabilities=Current liabilities+Longterm liabilities
=$102,000+ $396,000
=$498,000
Stockholders' equity=$1,423,333.33 -$498,000
=$925333.33
Return on stockholders' equity=Net income/Stockholders' equity
=170800/$925333.33
=18.46%
Answer:b The new level of sales will be:
Sales=Total assets* Total assets turnover
=$1,423,333.33 *3.60
=$5124000
Net income=Sales*Profit margin
=$5124000 *4%
=$204960
Return on stockholders' equity=Net income/Stockholders' equity
=$204960/$925333.33
=22.15%
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