Question

21. Use the following financial statements for the XYZ Corporation:

                        Income Statement

	2015
Sales	$3,000,000
Cost of Goods Sold	2,000,000

Depreciation	300,000
EBIT	700,000
Interest	200,000
Taxable Income	500,000
Taxes (40%)	200,000
Net Income	$300,000

Dividends	$150,000
Add. to Retained Earnings	$150,000

Balance Sheet

Assets				Liabilities & Owner's Equity
	2014	2015				2014	2015
Cash	$160,000	$190,000			Accounts Payable	$310,000	$330,000
Accounts Receiv.	400,000	450,000			Notes Payable	270,000	270,000
Inventory	320,000	360,000			Current Liabilities	580,000	$600,000
Current Assets	880,000	1,000,000
					Long-term Debt	1,750,000	2,000,000
Net Fixed Assets	2,700,000	3,000,000			Total Liabilities	2,330,000	2,600,000
					Common Stock	1,000,000	1,000,000
					Retained Earnings	250,000	400,000
					Total Owner's Equity	1,250,000	1,400,000
Total Assets	$3,580,000	$4,000,000			Total	$3,580,000	$4,000,000

a) What is the profit margin for this firm for 2015?

        b) What is the Total Asset Turnover for this firm for 2015?

        c) What is the Equity Multiplier for this firm for 2015?

        d) What is the Return on Equity based on the DuPont Identity for this firm for 2015?

e) What is the Sustainable Growth Rate for the XYZ Corporation in 2015?

Answer 1

a)

Profit margin = Net Income/Net Sales

                    = $ 300,000 /$ 3,000,000 = 0.10 or 10 %

b)

Total Asset Turnover = Net sales/Average total assets

                                     = $ 3,000,000/ ($ 3,580,000 + $ 4,000,000)

                                     = $ 3,000,000/(7,580,000/2)

                                     = $ 3,000,000/$ 3,790,000

                                    = 0.7916

c)

Equity Multiplier = Total assets/Total equity

                               = $ 4,000,000/ $ 1,250,000

                               = 3.2

d)

Return on equity under DuPont analysis = Net Income/Net Sales x Net sales/total assets x total assets /Total equity = Net Income/Total equity = $ 300,000/$ 1,250,000

                                                = 0.24

******Answered first four sub parts.