Question

Tube Company has $1,200,000 in assets and $500,000 of debt. It reports net income of $150,000. a. What is the return on the assets? b. What is the return on stockholders' equity? c. If the firm has an asset turnover ratio of 3 times, what is the profit margin (return on sales)?

Answer 1

Answer: Requirement a: Return on assets Net income= $150,000 Total assets=$1,200,000 Return on assets = net income/total assets Return on assets =$150 000/1,200,000 =12.5% Requirement b: Return on the stockholders' equity Net income=$150,000 Stockholders' equity = Assets-liabilities = $1,200,000-500,000 = $700,000 Return on stockholders' equity=Net income/Stockholders equity Return on shareholders' equity=$150,000/700,000 = 21.43% Requirement c: Return on sales Profit margin= Net income/Sales Turnover ratio=Sales/Assets Sales/1200000 = 3 Sales = $3,600,000 Profit margin = $150,000/3,600,000 = 4.17%