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Answer Jerry Rice and Grain Stores

Jerry Rice and Grain Stores had $4 million in yearly sales, earning a 3.5% profit margin and turning over assets 2.5 times per year. It had $100,000 in current liabilities and $300,000 in long-term liabilities. Its return on stockholders' equity was calculated to be 11.67%. If the asset turnover increased to 3 times per year while other factors remained the same, the return on stockholders' equity would increase to 14%.

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441 views2 pages

Answer Jerry Rice and Grain Stores

Jerry Rice and Grain Stores had $4 million in yearly sales, earning a 3.5% profit margin and turning over assets 2.5 times per year. It had $100,000 in current liabilities and $300,000 in long-term liabilities. Its return on stockholders' equity was calculated to be 11.67%. If the asset turnover increased to 3 times per year while other factors remained the same, the return on stockholders' equity would increase to 14%.

Uploaded by

Jken Ortiz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Jerry Rice and Grain Stores has $4,000,000 in yearly sales. The firm earns 3.

5 percent on each
dollar of sales and turns over its assets 2.5 times per year. It has $100,000 in current
liabilities and $300,000 in long-term liabilities.
a. What is its return on stockholders’ equity?
b. If the asset base remains the same as computed in part a, but total asset turnover goes
up to 3, what will be the new return on stockholders’ equity? Assume that the profit
margin stays the same as do current and long-term liabilities.

Answer

Jerry Rice and Grain Stores


a.
Net income  Sales  profit margin
 $4,000,000  3.5%
 $140,000

Stockholders equity  Total assets  Total liabilities


Total assets  Sales/Total asset turnover
 $4,000,000/2.5
 $1,600,000

Total liabilities  Current liabilities  Long  term liabilities


 $100,000  $300,000
 $400,000

Stockholders' equity  $1,600,000  $400,000  $1,200,000

Net income
Return on stockholders' equity 
Stockholders' equity
$140,000
  11.67%
$1,200,000

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b. The new level of sales will be:
Sales  Total assets  Total assets turnover
 $1,600,000  3
 $4,800,000

Net income  Sales  Profit margin


 $4,800,000  3.5%
 $168,000

Net income
Return on stockholders' equity 
Stockholders' equity
$168,000
  14%
$1, 200,000

This study source was downloaded by 100000836721472 from [Link] on 10-21-2022 [Link] GMT -05:00

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