Question

Compute ROA, Profit Margin, and Asset Turnover Refer to the financial information for Target Corporation, presented below: Target Corporation Balance Sheets ($ millions) January 31, 2015 February 1, 2014 Assets Cash and cash equivalents $2,210 $670 Inventory 8,790 8,278 Other current assets 3,087 2,625 Total current assets 14,087 11,573 Property and equipment, net 25,958 26,412 Other noncurrent assets 1,359 6,568 Total assets $41,404 $44,553 Liabilities and shareholders’ investment Accounts payable $7,759 $7,335 Accrued and other current liabilities 3,886 4,299 Current portion of long-term debt and notes payable 91 1,143 Total current liabilities 11,736 12,777 Long-term debt 12,705 11,429 Deferred income taxes 1,321 1,349 Other noncurrent liabilities 1,645 2,767 Total shareholders’ investment 13,997 16,231 Total liabilities and shareholders’ investment $41,404 $44,553 Target Corporation Income Statement ($ millions) Fiscal year ended January 31, 2015 Sales revenue $72,618 Cost of sales 51,278 Selling, general and administrative expenses 14,676 Depreciation and amortization 2,129 Earnings from continuing operations before interest and income taxes 4,535 Net interest expense 882 Earnings from continuing operations before income taxes 3,653 Provision for income taxes 1,204 Net earnings from continuing operations 2,449 Discontinued operations, net of tax (4,085) Net earnings (loss) $(1,636) a. Compute its return on assets (ROA) for the fiscal year ending January 31, 2015. Compute ROA using net earnings (loss). Assume a statutory tax rate of 35%. Round your answer to one decimal place. Use negative sign with answer, if appropriate. Return on Assets = Answer % b. Disaggregate ROA into profit margin (PM) and asset turnover (AT). Round your answers to one decimal place. Use negative sign with answers, if appropriate. Profit Margin = Answer % Asset Turnover =

Answer 1

Solution:-

a. Compute its return on assets (ROA) for the fiscal year ending January 31, 2015. Compute ROA using net earnings (loss). Assume a statutory tax rate of 35%:-

• Here, we need to findout the return on assets .
• Return on assets = [Net income + interest expense ] / average total assets

Where,

Net income = $1,636

interest expense = $882 * (100 % - 35%)

= $546.84

interest expense =  $546.84

average total assets = [ $41,404 + $44,553 ] / 2

= 85,957 / 2

= $42,978.5

Average total assets = $42,978.5

Return on assets = [Net income + interest expense ] / average total assets

= [ $1,636 + $546.84) / $42,978.5

= 0.0507

Return on assets = 5.07%

b. Disaggregate ROA into profit margin (PM) and asset turnover (AT). Round your answers to one decimal place:-

• Here ,we need to findout the proit margin and asset turnover .

Profit Margin = net income / net sales

Where,

net income = $1,636

net sales = $72,618

Profit Margin = $1,636 /  $72,618

= 0.0225

Profit Margin = 2.25%

Profit Margin = 2.25%

Asserts turnover = Net sales / average toatl assets

Where ,

net sales = $72,618

average total assets = [ $41,404 + $44,553 ] / 2

= 85,957 / 2

= $42,978.5

Average total assets = $42,978.5

Asserts turnover = $72,618 / $42,978.5

= 1.689 times

Asserts turnover = 1.689 times