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Chapter 2: 26BP_a (page 83)

In January 2007, the Status Quo Company was formed. Total assets were \(544,000, of which \)306,000 consisted of depreciable fixed assets. Status

Quo uses straight-line depreciation of \(30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been \)29,000 per year each of the last 10 years. Other assets have not changed since 2007.

a. Compute return on assets at year-end for 2007, 2009, 2012, 2014, and 2016.

(Use $29,000 in the numerator for each year.)

Short Answer

Expert verified

Year

Return on assets

2007

5.65%

2009

6.41%

2012

8.05%

2014

9.69%

2016

12.18%

Step by step solution

01

Current Assets for the year ending 2007, 2009, 2012, 2014, and 2016 

Currentassets=Totalassets-Fixedassets=$544,000-$306,000=$238,000

02

Fixed assets

Year

Opening balance (a)

Depreciation(b)

Closing balance (a 鈥� b)

2007

$306,000

$30,600

$275,400

2008

275,400

30,600

244,800

2009

244,800

30,600

214,200

2010

214,200

30,600

183,600

2011

183,600

30,600

153,000

2012

153,000

30,600

122,400

2013

122,400

30,600

91,800

2014

91,800

30,600

61,200

2015

61,200

30,600

30,600

2016

$30,600

$30,600

0

03

Total assets

Year

Fixed assets (a)

Current assets (b)

Total assets (a+b)

2007

$275,400

$238,000

$513,400

2009

214,200

238,000

452,200

2012

122,400

238,000

360,400

2014

61,200

238,000

299,200

2016

0

$238,000

$238,000

04

Return on assets

Year

Net Income (a)

Total assets (b)

Return on assets (a/b)

2007

$29,000

$513,400

5.65%

2009

29,000

452,200

6.41%

2012

29,000

360,400

8.05%

2014

29,000

299,200

9.69%

2016

$29,000

$238,000

12.18%

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Most popular questions from this chapter

Boise Timber Co. computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are \(6,500,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is \)9. How many units does the firm need to sell to reach the cash break-even point?

Conn Man鈥檚 Shops, a national clothing chain, had sales of \(350 million last year. The business has a steady net profit margin of 9 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown next. The firm鈥檚 marketing staff has told the president that in the coming year

there will be a large increase in the demand for overcoats and wool slacks. A

sales increase of 20 percent is forecast for the company.

BALANCE SHEET

End of year (in \) million)

Assets

Liabilities and Stockholder鈥檚 equity

Cash

\(25

Accounts payable

\)64

Accounts receivable

40

Accrued expenses

31

Inventory

82

Other payables

45

Plant and equipment

133

Common stock

50

Retained earnings

90

Total assets

\(280

Total liabilities and stockholder鈥檚 equity

\)280

All balance sheet items are expected to maintain the same percent-of-sales relationships as last year,* except for common stock and retained earnings. No change is scheduled in the number of common stock shares outstanding, and retained earnings will change as dictated by the profits and dividend policy of the firm. (Remember the net profit margin is 9 percent.)

a. Will external financing be required for the company during the coming

year?

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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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