Chat with AIExam 4: Profitability Analysis
Raleigh Manufacturing reported net income (amounts in millions)of $1,166 on sales of $5,520 during Year4.Interest expense totaled $75.The income tax rate was 30 percent.Average total assets were $7,135,and average common shareholders' equity was $3,405.The firm did not have preferred stock outstanding or minority interest in its equity.
REQUIRED:a.Compute the rate of ROA.Disaggregate ROA into profit margin for ROA and assets
turnover components.
b.Compute the rate of ROCE.Disaggregate ROCE into profit margin for ROCE,assets
turnover,and capital structure leverage ratio components.
c.Calculate the amount of net income to common shareholders derived from the
excess return on creditors' capital and the amount from the return on common
shareholders' capital.
(67) 
Verifieda.Rate of Return on Assets: [$1,166 + (1 - .30)($75)]/$7,135 = 17.1%
Profit Margin for ROA: [$1,166 + (1 - .30)($75)]/$5,520 = 22.1%
Assets Turnover: $5,520/$7,135 = 0.77
b.Rate of Return on Common Shareholders' Equity: $1,166/$3,405 = 34.2%
Profit Margin for ROCE: $1,166/$5,520 = 21.1%
Assets Turnover: $5,520/$7,135 = .77
Capital Structure Leverage Ratio: $7,135/$3,405 =2.1
c.
average total liabilities equal $3,730 (= $7,135 - $3,405).Raleigh earned $637.8 (= .171 x $3,730)on assets financed by liabilities,while the liabilities cost $52.5 [= (1 - .30)($75)].Therefore,the excess return generated for the common shareholders on assets financed with liabilities is $585.3 (= $637.8 - $52.5).The assets financed by common shareholders' capital generated a return for the common shareholders of $582.3 (= .171 × $3,405).Thus,net income available to the common shareholders equals $1,167.6 (= $585.3 + $582.3).
about one-half of the return to the common shareholders results from the successful use of financial leverage.
Examine the four following conditions involving inventory turnover.Discuss what economic factors might be leading to the condition and whether it suggests positive or negative future economic conditions.
Condition A: Increasing cost of goods sold to sales percentage, coupled with an increasing inventory turnover. Condition B: Decreasing cost of goods sold to sales percentage, coupled with a decreasing inventory turnover. Condition C: Increasing cost of goods sold to salespercentage, coupled with a decreasinginventory turnover. Condition D: Decreasing cost of goods sold to sales percentage, coupled with an increasing inventory turnover.
(82) VerifiedCondition A: Increasing cost of goods sold to sales percentage,coupled with an increasing inventory turnover.Firm lowers prices to sell inventory more quickly.Firm shifts its product mix toward lower margin,faster moving products.Firm outsources the production of a higher proportion of its products,requiring the firm to share profit margin with the outsourcer but reducing the amount of raw materials and work-in-process inventories.Condition B: Decreasing cost of goods sold to sales percentage,coupled with a decreasing inventory turnover.Firm raises prices to increase its gross margin but inventory sells more slowly.Firm shifts its product mix toward higher margin,slower moving products.Firm produces a higher proportion of its products instead of outsourcing,thereby capturing more of the gross margin but requiring the firm to carry raw materials and work-in-process inventories.Condition C: Increasing cost of goods sold to sales percentage,coupled with a decreasing inventory turnover.Weak economic conditions lead to reduced demand for a firm's products,necessitating price reductions to move goods.Despite price reductions,inventory builds up.Condition D: Decreasing cost of goods sold to sales percentage,coupled with an increasing inventory turnover.Strong economic conditions lead to increased demand for a firm's products,allowing price increases.
an inability to replace inventory as fast as the firm sells it leads to an increased inventory turnover.Firm implements a just-in-time inventory system,reducing storage costs,product obsolescence,and the amount of inventory held.
Rattigan Industries reported net income (amounts in thousands)for Year 4 of $60,615 on sales of $1,560,235.It declared preferred dividends of $22,100.Preferred shareholders'
equity totaled $265,750 at both the beginning and end of Year4.Common shareholders' equity totaled $298,150 at the beginning of Year 4 and $365,000 at the end of Year4.Rattigan had no minority interest in its equity.Total assets were $1,440,000 at the beginning of Year 4 and $1,550,000 at the end of Year 4.
(83) VerifiedRate of Return on Common Shareholders' Equity:
($60,615 - $22,100)/[.5($298,150 + $365,000)] = 11.6%
Profit Margin for ROCE:
($60,615 - $22,100)/($1,560,235)= 2.5%
Assets Turnover:
$1,560,235/[.5($1,440,000 + $1,550,000)] = 1.04
Capital Structure Leverage Ratio:
[.5($1,440,000 + $1,550,000)]/[.5($298,150 + $365,000)] = 4.5
Discuss how the following three elements of risk help us understand return on assets differs across firms and changes over time:1.Operating leverage
2.Cyclicality of sales
3.Product life cycle
(73) Net Devices Inc.
The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
-Refer to the information for Net Devices Inc.What is the rate of return on assets for Net Devices for 2011?
-Refer to the information for Net Devices Inc.What is the rate of return on assets for Net Devices for 2011? (69) Explain the difference between a simple and complex capital structure as the terms are used in the calculation of EPS.
(79) Net Devices Inc.
The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
-Refer to the information for Net Devices Inc.What is the inventory turnover for Net Devices for 2011?
-Refer to the information for Net Devices Inc.What is the inventory turnover for Net Devices for 2011? (82) Return on common equity can be disaggregated into profit margin for ROCE,capital structure leverage and _________________________________________________.
(81) Accounts receivable turnover is calculated by dividing ________________________________________ by average net accounts receivable.
(78) Sensitron and Douglas Tools manufacture and market power tools and accessories.Sensitron targets customers in the professional contractor market,while Douglas Tools focuses on home users and professionals.Selected financial data for the companies appears below.
Required:
1. Calculate the accounts recervale turnaver ratid far each firm far year 2010, 2009, 2008.
2. Sugest reasons far the differences in the accounts receivable turnver ratios far these two firmen.
Required:
1. Calculate the accounts recervale turnaver ratid far each firm far year 2010, 2009, 2008.
2. Sugest reasons far the differences in the accounts receivable turnver ratios far these two firmen. (78) Net Devices Inc.
The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
-Refer to the information for Net Devices Inc.What is the accounts receivable turnover ratio for Net Devices for 2011?
-Refer to the information for Net Devices Inc.What is the accounts receivable turnover ratio for Net Devices for 2011? (70) Net Devices Inc.
The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players. For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
-Refer to the information for Net Devices Inc.What is Net Devices' capital structure leverage ratio for 2011?
-Refer to the information for Net Devices Inc.What is Net Devices' capital structure leverage ratio for 2011? (73) Common-size analysis requires the analyst to be aware that percentages can change because of all of the following except:
(71) In order to measure how profitable a firm is in generating a return for its common shareholders,a financial analyst would examine the return on _____________________________________________.
(89) Return on assets can be disaggregated into asset turnover and ____________________________________________________________.
(78) The profit margin for ROA indicates the ability of a firm to generate earnings for a particular level of
(71) Carl Industries
Carl Industries has condensed balance sheets as shown:
-Refer to the information for Carl Industries.In a common size balance sheet for 2010,plant and equipment (net)is expressed as
-Refer to the information for Carl Industries.In a common size balance sheet for 2010,plant and equipment (net)is expressed as (83) Ramos Company
Ramos Company included the following information in its annual report:
Sales \ 178,400 \ 162,500 \ 155,500 Cost of goods sold 115,000 102,500 100,000 Operating expenses 50,000 50,000 45,000 Net income 13,400 10,000 10,500
- Refer to the information for Ramos Company.In a common size income statement for 2011,the operating expenses are expressed as:
(94) 
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