Question

Markus Company’s common stock sold for $2.75 per share at the end of this year. The company paid a common stock dividend of $0.55 per share this year. It also provided the following data excerpts from this year’s financial statements

	Ending    Balance		Beginning Balance
Cash	$	35,000	$	30,000
Accounts receivable	$	60,000	$	50,000
Inventory	$	55,000	$	60,000
Current assets	$	150,000	$	140,000
Total assets	$	450,000	$	460,000
Current liabilities	$	60,000	$	40,000
Total liabilities	$	130,000	$	120,000
Common stock, $1 par value	$	120,000	$	120,000
Total stockholders’ equity	$	320,000	$	340,000
Total liabilities and stockholders’ equity	$	450,000	$	460,000

	This Year
Sales (all on account)	$	700,000
Cost of goods sold	$	400,000
Gross margin	$	300,000
Net operating income	$	140,000
Interest expense	$	8,000
Net income	$	92,400

1. What is the return on total assets (assuming a 30% tax rate)? (Round percentage answer to 1 decimal place. i.e., 0.123 should be considered as 12.3%)

2. What is the return on equity? (Round your answer to the nearest whole percentage place. i.e., 0.1234 should be considered as 12%)

3. What is the book value per share at the end of this year? (Round your answer to 2 decimal places.)

4. What is the average collection period? (Use 365 days in a year. Round your intermediate and final answers to 2 decimal places.)

5. What is the equity multiplier? (Round your answer to 2 decimal places.)

Answer 1

Solution:

1)

Return on Total Assets is the income in pecentage term earned by the company by using total assets into the business.

Return on Total Assets can be calculated by two ways:

a) Return on Total Assets = Operating Income after tax / Average Total Assets x 100

Avearge Total Assets = (450,000 + 460,000)/2 = $455,000

Operating Income after tax = $140,000 (1 - 0.30) = $98,000

Return on Total Assets =  Operating Income after tax $98,000 / Average Total Assets 455,000 x 100

= 21.54%

b) Return on Total Assets = Operating Income / Average Total Assets x 100

= $140,000 / $455,000 x 100

= 30.77%

2)

Return on Equity = Net Income after tax / Average Stockholders' Equity x 100

Average Stockholders Equity = (Beginning $340,000 + ending $320,000) / 2 = $330,000

Net Income after tax = $92,400

Return on Equity = Net Income after tax 92,400 / Average Stockholders' Equity 330,000 x 100 = 28%

3) Book Value Per Share at the end of this year = Net Asset Value / Number of Shares outstanding

Net Assets Value = Stockholders Equity = Total Assets - Total LIabilities = 320,000

Outstanding Shares = $120,000 / Par Value $1 = 120,000 Shares

Book Value = Net Asset value 320,000 / Number of Shares outstanding 120,000 = 2.67

4)

Average Collection Period = Number of Days in a year / Receivable Turnover Ratio

Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning 50,000 + Ending 60,000)/2 = $55,000

Receivable Turnover Ratio = Net Credit Sales 700,000 / Average Accounts Receivable 55,000 = 12.727272

Average Collection Period = Number of Days in a year 365 days / Receivable Turnover Ratio 12.727272

= 28.68 Days

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