Question

Castile Products, Inc. Balance Sheet December 31 Assets Current assets: Cash $ 20,000 Accounts receivable, net 160,000 Merchandise inventory 380,000 Prepaid expenses 11,000 Total current assets 571,000 Property and equipment, net 870,000 Total assets $1,441,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 210,000 Bonds payable, 9 300,000 Total liabilities 510,000 Stockholders' equity Common stock, $5 per value $ 180,000 Retained earnings 751,000 Total stockholders' equity 931,000 Total liabilities and stockholders' equity $1,441,000 Castile Products, Inc. Income Statement For the Year Ended December 31 Sales $2,170,000 Cost of goods sold 1,250,000 Gross margin 920,000 Selling and administrative expenses 610,000 Net operating income 310,000 Interest expense 27,000 Net income before taxes 283,000 Income taxes (30%) 84,900 Net income $ 198, 100 Account balances at the beginning of the year were: accounts receivable, $180,000, and inventory, $280,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders' equity totaled $645,000. Required: Compute the following: (For Requirements 1 to 4, enter your percentage answers rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 1. Gross margin percentage. 2. Net profit margin percentage. 3. Return on total assets. 4. Return on equity. 5. Was financial leverage positive or negative for the year?

Answer 1

1	Gross margin percentage	=	Gross Profit (Margin)	/	Sales
		=	920,000.00	/	2,170,000.00	=	42.40%
2	Net profit margin percentage	=	Net Profit	/	Sales
		=	198,100.00	/	2,170,000.00	=	9.13%
3	Return on total assets	=	Net income	/	Total average assets
		=	198,100.00	/	(1,070,000 + 1,441,000)/2	=	15.78%
4	Return on equity	=	Net income	/	Total average equity
		=	198,100.00	/	(645,000 + 931,000)/2	=	25.14%
5	Financial leverage	=	EBIT	/	EBT
		=	310,000.00	/	283,000.00	=	1.10
	Financial leverage is Positive