Financial Analysis

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PROBLEM 8-1

Net Profit Margin| =| Net Income Before Minority Share of Earnings and Nonrecurring Items| | | Net Sales|

2011| | 2010| $52,500| | $40,000| $1,050,000| | $1,000,000| | | | = 5.00%| | = 4.00%|

Return on Assets| =| Net Income Before Minority Share of Earnings and Nonrecurring Items| | | Average Total Assets|

2011| | 2010| $52,500| | $40,000| $230,000| | $200,000| | | | = 22.83%| | = 20.00%|

Total Asset Turnover| =| Net Sales|
| | Average Total Assets|

2011| | 2010| $1,050,000| | $1,000,000| $230,000| | $200,000| | | | =4.57 timesper year| | =5.00 timesper year|

Return on Common Equity| =| Net Income Before Nonrecurring Items – Preferred Dividends| | | Average Common Equity|

2011| | 2010| $52,500| | $40,000| $170,000| | $160,000| | | | = 30.88%| | = 25.00%|

Ahl Enterprise has had a substantial rise in profit to sales. This is somewhat tempered by a reduction in asset turnover. Given a slight rise in common equity, there is a substantial rise in return on common equity.

PROBLEM 8-2

a.
| 2011| | 2010|
Sales| 100.0%| | 100.0%|
Cost of goods sold| 60.7| | 60.8| Gross profit| 39.3| | 39.2| Selling expense| 14.6| | 20.0| General expense| 10.0| | 8.3| Operating income| 14.7| | 10.9| Income tax| 5.9| | 4.2|

Net income| 8.8%| | 6.7%|

b.Starr Canning has had a sharp decrease in selling expense coupled with only a modest rise in general expenses giving an overall rise in the net profit margin.

PROBLEM 8-3

Earnings before interest and tax| $| 245,000|
Interest (750,000 x 6%)| | 45,000|...
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