Question

East Point Retail, Inc., sells professional women's apparel through company-owned retail stores. Recent financial information for East Point is provided below (all numbers in thousands). Fiscal Year 3 Fiscal Year 2 $77,400 Net income $150,400 Interest expense 3,100 11,600 Total assets (at end of fiscal year) Total stockholders' equity (at end of fiscal year) Fiscal Year 3 $2,760,307 1,133,612 Fiscal Year 2 $2,625,657 1,111,164 Fiscal Year 1 $2,318,787 823,836 Assume the apparel industry average return on total assets is 8.0%, and the average return on stockholders' equity is 15.0% for the year ended April 2, Year 3. a. Determine the return on total assets for East Point for fiscal Years 2 and 3. Round to one decimal place. Fiscal Year 3 Fiscal Year 2 b. Determine the return on stockholders' equity for East Point for fiscal Years 2 and 3. Round to one decimal place. Fiscal Year 3 % Fiscal Year 2 c. The return on stockholders' equity is the return on total assets due to the use of leverage. d. During fiscal Year 3, East Point's results were return on stockholders' equity was compared to the industry average. The return on total assets for East Point was than the industry average. These relationships suggest that East Point has than the industry average. The leverage than the industry, on average.

Answer 1

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a) Fiscal Year 3 Fiscal Year 2 5.6% 3.1% b) Fiscal Year 3 Fiscal Year 2 13.4% 8.0% Working notes: Total Assets Total Stockholders equity Year 3 $2,760,307) $1,133,612 Year 2 $2,625,657 $1,111,164 Year 1 $2,318,787 $823,836 Average Assets Average Stockholders equity $2,692,982 $1,122,388 $2,472,222 $967,500 Net Income $150,400 $77,400 5.6% 3.1% Return on Total Assets (Net Income /Average Assets) 13.4% 8.0% Return on Total Stockholders' equity (Net Income /Average Stockholders' equity) Average Assets and Stockholders equity is calculated = (Opening balance + Closing balance )/2 c) The return on stockholders' equity is greater than the return on total assets due to the positive use of leverage b) During fiscal year 3, East Point's results were weak compared to the industry average. The return on total assets for East Point was lower than the industry average The return on stockholders equity was lower than the industry average These relationships suggest that East Point has lower leverage than the industry, on average