17BP_a Assume the following data for Ca... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 17BP_a (page 80)

Assume the following data for Cable Corporation and Multi-Media Inc.
Capable corporation
Muli-media inc
Net income
$31,200
$140,000
Sales
317,000
2,700,000
Total assets
402,000
965,000
Total debts
163,000
542,000
Stockholder鈥檚 equity
239,000
423,000
Compute the return on stockholders鈥� equity for both firms using Ratio 3a. Which firm has the higher return?

Short Answer

Expert verified

Return on stockholder鈥檚 equity of Capable corporation is 13.05% and Multimedi Inc. is 33.10%.

Hence, the Return on stockholder鈥檚 equity of Multimedia Inc is more than that of the capable corporation.

Step by step solution

Return on stockholder’s equity of capable corporation

$\begin{array}{rcl} Return on shareholder' s equity & = & \frac{Net income}{Shareholder' s equity} \\ = & \frac{$ 31, 200}{$ 239, 000} \\ = & 13.05 % \end{array}$

Return on stockholder’s equity of Multimedia Inc.

$\begin{array}{rcl} Return on shareholder' s equity & = & \frac{Net income}{Shareholder' s equity} \\ = & \frac{$ 140, 000}{$ 423, 000} \\ = & 33.10 % \end{array}$

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Selling and administrative expenses	$328,000
Depreciation expenses	195,000
Sales	1,660,000
Interest expenses	129,000
Cost of goods sold	560,000
Taxes	171,000

	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

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Short Answer

Step by step solution

Return on stockholder’s equity of capable corporation

Return on stockholder’s equity of Multimedia Inc.

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	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder鈥檚 equity	239,000	423,000