Question

Some recent financial statements for Smolira Golf Corp. follow. Assets 2017 2018 Current assets Cash Accounts receivable Inventory $ 23,086 13,848 27,362 SMOLIRA GOLF CORP. 2017 and 2018 Balance Sheets Liabilities and Owners' Equity 2018 2017 Current liabilities $ 25,500 Accounts payable $ 24,584 16,600 Notes payable 15,000 28,500 Other 12,971 $ 70,600 Total $ 52,555 Long-term debt $ 55,000 $ 28,500 12.200 18,300 Total $ 64,296 $59.000 $ 49,383 $ 52,000 $ 52,000 Owners' equity Common stock and paid in surplus Accumulated retained earnings 243.436 274,617 Fixed assets Net plant and equipment $338,695 Total $364,400 $ 326,617 $295.436 $ 402.991 $435,000 Total assets Total liabilities and owners' equity $435,000 $ 402,991

Answer 1

Profit margin = net income / sales = ($55,181, / $359,607)

Total asset turnover = sales / average total assets

average total assets = ($402,991 + $435,000) / 2 = $418,995.50

Total asset turnover = ($359,607 / $418,995.50)

Equity multiplier = Average total assets / average equity

Average equity = ($295,436 +$326,617) / 2 = $311,026.50

Equity multiplier = $418,995.50 / $311,026.50

ROE = Profit margin * Total asset turnover * Equity multiplier

ROE = ($55,181, / $359,607) * ($359,607 / $418,995.50) * ($418,995.50 / $311,026.50)

ROE = 17.74%