Question

Financial Leverage

Costco Wholesale Corporation (COST) and Wal-Mart Stores Inc. (WMT) reported the following data (in millions) for a recent year:

	Costco			Wal-Mart
Sales		$116,199			$482,130
Operating income		2,377			15,080
Average total assets		33,232			201,536
Average stockholders’ equity		11,460			80,970

1. Compute the return on total assets. Round to one decimal place.

	Return on Total Assets
Costco			%
Wal-Mart			%

2. Compute the return on stockholders’ equity. Round to one decimal place.

	Return on Stockholders’ Equity
Costco			%
Wal-Mart			%

3. Compute the profit margin, asset turnover, and financial leverage metrics. Round to two decimal places.

	Costco			Wal-Mart
Profit Margin			%			%
Asset Turnover
Financial Leverage

Answer 1

1	Return on Total Assets
	Costco	2377 / 33232	7.2%
	Wal-Mart	15080 / 201536	7.5%
	Net Income / Average total assets
2	Return on Stockholders’ Equity
	Costco	2377 / 11460	20.7%	%
	Wal-Mart	15080 / 80970	18.6%	%
	Net Income / Average stockholders’ equity
3		Costco	Wal-Mart
	Profit Margin	2.0%	2.4%	%
	Asset Turnover	3.5	2.4
	Financial Leverage	1.9	1.5
	Profit Margin = Net Income / Sales
	Asset Turnover = Net Sales / Average total assets
	Financial leverage = Total Debt / Shareholder’s Equity	21772 / 11460	120566 / 80970
	Total Debt = Total Asstes - Shareholder’s Equity	21,772	120566