Question

Profitability Ratios

East Point Retail, Inc., sells professional women's apparel through company-owned retail stores. Recent financial information for East Point is provided below (all numbers in thousands).

Fiscal Year 3Fiscal Year 2

Net income$150,000 $77,300  

Interest expense3,100 11,500  

Fiscal Year 3Fiscal Year 2Fiscal Year 1

Total assets (at end of fiscal year)$2,120,642 $2,017,196 $1,761,528

Total stockholders' equity (at end of fiscal year)1,089,928 1,068,346 794,304

Assume the apparel industry average return on total assets is 8.0%, and the average return on stockholders’ equity is 15.0% for the year ended April 2, Year 3.

a. Determine the return on total assets for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3 %

Fiscal Year 2 %

b. Determine the return on stockholders' equity for East Point for fiscal Years 2 and 3. Round to one decimal place.

Fiscal Year 3 %

Fiscal Year 2 %

c. The return on stockholders' equity is   the return on total assets due to the   use of leverage.

d.   During fiscal Year 3, East Point’s results were   compared to the industry average. The return on total assets for East Point was   than the industry average. The return on stockholders’ equity was   than the industry average. These relationships suggest that East Point has   leverage than the industry, on average.

Answer 1

Average Total Assets:
Year-2 (1761528+2017196) /2 =	1889362
Year-3 (2017196+2120642)/2=	2068919
Average Stockholder's equity:
Year-2 (794304+1068346) /2 =	931325
Year-3 (1068346+1089928)/2=	1079137
Req a:
Return on assets
			Year-2	Year-3
Net Income		77300	150000
Add: Interest expense	11500	3100
Income before Interest	88800	153100
Divide: Average total assets	1889362	2068919
Return on total assets	4.70%	7.40%
Req b.
Return on equity
			Year-2	Year-3
Net Income		77300	150000
Divide: Average stockholder's equity	931325	1079137
Return on equity		8.30%	13.90%
c.
The return on stockholder's equity is higher than return on assets due to higher use of leverage
reqd.
The return on total assets of East point is lower than industry average
The return on equity is also lower than industry average
These relationship suggest that East point has lower leverage tha the industry on average