Question

Jerry Rice and Grain Stores has $4,800,000 in yearly sales. The firm earns 3 percent on each dollar of sales and turns over its assets 3.5 times per year. It has $120,000 in current liabilities and $310,000 in long-term liabilities.   

a. What is its return on stockholders’ equity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

	Return on stockholders' equity 15.30 %

CORRECT

   

b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.70, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

	New return on stockholders' equity % NEED ANSWER

Answer 1

(a)-Return on Stockholders’ Equity

Net Income = Sales x Profit Margin

= $48,00,000 x 3%

= $144,000

Total Assets = Sales / Total Assets Turnover

= $48,00,000 / 3.50 Times

= $13,71,428.57

Total Liabilities = Current Liabilities + Long term liabilities

= $120,000 + $310,000

= $430,000

Total Stockholders Equity = Total Assets – Total Liabilities

= $13,71,428.57 - $430,000

= $9,41,428.57

Therefore, the Return on Stockholders’ Equity = (Net Income / Total Stockholders Equity) x 100

= ($144,000 / $ 9,41,428.57) x 100

= 15.30%

“Return on Stockholders’ Equity = 15.30%”

(b)-New return on stockholders' equity

New Sales = Total Assets x New Assets Turnover Ratio

= $13,71,428.57 x 3.70 Times

= $50,74,285.71

New Net Income = New Level of sales x Profit Margin

= $50,74,285.71 x 3%

= $1,52,228.57

Therefore, the New return on stockholders' equity = (Net Income / Total Stockholders Equity) x 100

= ($1,52,228.57/ $ 9,41,428.57) x 100

= 16.17%

“New return on stockholders' equity = 16.17%”