Question

Edman Company is a merchandiser that has provided the following balance sheet and income statement for this year.

		Beginning Balance			Ending Balance
Assets
Cash	$	62,800		$	150,000
Accounts receivable		160,000			180,000
Inventory		230,000			240,000
Property, plant & equipment (net)		833,000			793,000
Other assets		37,000			37,000
Total assets	$	1,322,800		$	1,400,000
Liabilities & Stockholders’ Equity
Accounts payable	$	70,000		$	80,000
Bonds payable		550,000			550,000
Common stock		410,000			410,000
Retained earnings		292,800			360,000
Total liabilities & stockholders’ equity	$	1,322,800		$	1,400,000

		This Year
Sales	$	2,500,000
Variable expenses:
Cost of goods sold		1,600,000
Variable selling expense		240,000
Total variable expenses		1,840,000
Contribution margin		660,000
Fixed expenses:
Fixed selling expenses		220,000
Fixed administrative expenses		300,000
Total fixed expenses		520,000
Net operating income		140,000
Interest expense (8%)		44,000
Net income before tax		96,000
Tax expense (30%)		28,800
Net income	$	67,200

What is this alternative’s estimated net profit margin percentage, total asset turnover, equity multiplier, and return on equity (ROE)?

1. Net profit margin % _____

2. Total assets turnover ____

3. Equity multiplier ____

4. ROE- Return on Equity _____

Answer 1

1 Net profit margin = (Net profit / sales) × 100

Edman net profit is $67,200

Edman company net sales is $2,500,000

Edman company net profit margin

= (67,200 / 2,500,000) × 100 = 2.68%

2 Total assets turnover = net sales / average total assets

Average total assets = (beginning total assets + ending total assets) / 2

Edman ending period total assets is $1,400,000 and beginning period total assets is $1,332,800

Average total assets of Edman

= (1,400,000 + 1,332,800) / 2 = $1,361,400

Edman total assets turnover

    = 2,500,000 / 1,361,400 = 1.83

3 Equivalent multiplier

= total assets / total shareholder's equity

Edman ending shareholders equity

= 410,000 + 360,000 = $770,000

Edman ending total assets is 1,400,000

Edman multiplier

= 1,400,000 / 770,000 = 1.81

4 Return on equity of Edman

= (net income / shareholders equity) × 100

Edman shareholders equity is $770,000

Net income of Edman is $67,200

Return on equity = (67,200 / 770,000) × 100 = 8.72%

Edman shareholder's equity include ending period retained earnings $360,000 and common stock $410,000.

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