Question

The financial statements for Castile Products, Inc., are given below: Castile Products, Inc. Balance Sheet December 31 Assets
Account balances at the beginning of the year were: accounts receivable, $200,000; and inventory $340,000. All sales were on
5. Was financial leverage positive or negative for the year? Positive Negative
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Answer #1

1. Gross Margin Percentage = Gross Margin / Sales *100

= 1000000 / 2250000 * 100

= 44.44 %

2. Net Profit Margin Percentage = Net Income / Sales * 100

= 236950 / 2250000 * 100

= 10.53 %

3. Return on Total Assets = EBIT / Net Operating Income / Average Total Assets * 100

Average Total Assets = Opening Assets + Closing Assets / 2

= 1100000 + 1452000 / 2

= 1276000

Return on Total Assets = EBIT / Net Operating Income / Average Total Assets * 100

= 370000 /1276000

= 28.99 % or 29 %

4. Return on Equity = Net Income / Average Stockholders Equity

Average Stockholders Equity = Opening Stockholders Equity + Closing Stockholders Equity / 2

= 725000 + 872000 /2

= 798500

Return on Equity = Net Income / Average Stockholders Equity * 100

= 236950 / 798500 * 100

= 29.67 %

5. Degree of financial leverage = EBIT or Net Operating Income / EBIT or Net Operating Income - Interest

= 370000 / 370000 - 31500

= 370000 / 338500

= 1.09

Financial Leverage = Total Debt / Total Equity

= 350000 / 872000

= 0.40

Therefore the Financial leverage is positive for the year.

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