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Chapter 2: 14BP a (page 80)
Gates Appliances has a return-on-assets (investment) ratio of 8 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
Return on equity, when the debt-to-total assets ratio is 40 percent: 13.33%.
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What effect will disinflation following a highly inflationary period have on the reported income of the firm?
Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)
c. Fixed asset turnover
DeSoto Tools Inc. is planning to expand production. The expansion will cost \(300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at \)30 per share. The current income statement before expansion is as follows:
DeSOTO TOOLS, INC. | ||
Sales | \(1,500,000 | |
Less: Variable cost | \)450,000 | |
Fixed cost | 550,000 | 1,000,000 |
Earning before interest and taxes | \(500,000 | |
Less: Interest expenses | 100,000 | |
Earning before taxes | \)400,000 | |
Less: Taxes @34% | 136,000 | |
Earning after taxes | \(264,000 | |
Shares | 100,000 | |
Earning per shares | \)2.64 |
After the expansion, sales are expected to increase by \(1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to \)800,000. The tax rate is 34 percent.
c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion.
a. Swank Clothiers had sales of \(383,000 and cost of goods sold of \)260,000. What is the gross profit margin (ratio of gross profit to sales)?
b. If the average firm in the clothing industry had a gross profit of 25 percent,
how is the firm doing?
Polly Esther Dress Shops Inc. can open a new store that will do an annual sales volume of $837,900. It will turn over its assets 1.9 times per year. The profit margin on sales will be 8 percent. What would net income and return on assets (investment) be for the year?
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