Question

The Moraine Company has net income of $168,850. There are currently 33.05 days' sales in receivables. Total assets are $857,000, total receivables are $148,200, and the debt-equity ratio is 70 .

a. What is the company's profit margin? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What is the company's total asset turnover? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c. What is the company's ROE? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

(a) For profit margin, we need to calculate sales.

First we will calculate the receivables turnover by the following formula:

Days' sales in receivables = 365 / Receivables turnover

Putting the values in the above formula, we get,

33.05 = 365 / Receivables turnover

Receivables turnover = 365 / 33.05 = 11.043872919

Now, we will calculate sales by the following formula:

Receivables turnover = Sales / Accounts receivables

Putting these values in the above formula, we get,

11.043872919= Sales / $148200

Sales = $148200 * 11.043872919 = $1636700

Now, we will calculate the profit margin by the following formula:

Profit margin = Net income / Sales * 100

Net income = $168850 , Sales = $1636700 (as calculated above)

Putting these values in the above formula, we get,

Profit margin = $168850 / $1636700 * 100

Profit margin = 10.32%

(b) Total asset turnover = Sales / Total assets

Total assets = $857000, Sales = $1636700 (as calculated in point (a) above)

Putting these values in the above formula, we get,

Total assets turnover = $1636700 / $857000 = 1.91 times

(c) For ROE, we need to calculate the equity.

Debt equity ratio = Debt / Equity

So,

0.7 = Debt / equity

Debt = 0.7* equity.

As per accounting equation,

Total assets = Debt + Equity

$857000 = 0.7 * Equity + Equity

$857000 = 1.7 * Equity

Equity = $857000 / 1.7

Equity = $504117.647058

Now,we will calculate return on equity as per below:

Return on equity = Net income / Equity * 100

Net income = $168850, Equity = $504117.647058 (as calculated above)

Putting these values in the above formula, we get,

Return on equity = $168850 / $504117.6470 * 100

Return on equity = 33.50%