Problems

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Chapter 3

Problems

1.Dental Delights has two divisions. Division A has a profit of $200,000 on sales of $4,000,000. Division B is only able to make $30,000 on sales of $480,000. Based on the profit margins (returns on sales), which division is superior?

3-1.Solution:

Dental Delights

Division ADivision B

[pic]

Division B is superior

3.Bass Chemical, Inc., is considering expanding into a new product line. Assets to support this expansion will cost $1,200,000. Bass estimates that it can generate $2 million in annual sales, with a 5 percent profit margin. What would net income and return on assets (investment) be for the year?

3-3.Solution:Bass Chemical, Inc.

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4.Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of $750,000. It will turn over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year?

3-4.Solution:

Franklin Mint and Candy Shop

[pic]
8.Sharpe Razor Company has total assets of $2,500,000 and current assets of $1,000,000. It turns over its fixed assets 5 times a year and has $700,000 of debt. Its return on sales is 3 percent. What is Sharpe’s return on stockholders’ equity?

3-8.Solution:

Sharpe Razor Company

total assets$2,500,000
– current assets 1,000,000
Fixed assets$1,500,000

[pic]

total assets$2,500,000
–debt 700,000
Stockholders’ equity$1,800,000

[pic]

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11.Acme Transportation Company has the following ratios compared to its industry for 2009.

| |Acme Transportation |Industry | |Return on assets…………… | 9% | 6% | |Return on equity…………… |12% |24% |

Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to the industry. No numbers are necessary; a one-sentence answer is all that is required.

3-11.Solution:

Acme Transportation Company

Acme Transportation has a lower debt/total assets ratio than the industry.

For those who did a calculation, Acme’s debt to assets were 25% vs 75% for the industry.

14.Jerry Rice and Grain Stores has $4,000,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 2.5 times per year. It has $100,000 in current liabilities and $300,000 in long-term liabilities. a.What is its return on stockholders’ equity?

b.If the asset base remains the same as computed in part a, but total asset turnover goes up to 3, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities.

3-14.Solution:

Jerry Rice and Grain Stores

a. [pic]

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3-14. (Continued)

b.The new level of sales will be:

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25.Calloway Products has the following data. Industry information is also shown.

Industry Data on Net YearNet IncomeTotal AssetsIncome/Total Assets 2006$360,000$3,000,00011%
2007380,0003,400,0008
2008380,0003,800,0005

Industry Data on
YearDebtTotal AssetsDebt/Total Assets
2006$1,600,000$3,000,00052%
20071,750,0003,400,00040
20081,900,0003,800,00031

As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in terms of: a.Net income/Total assets?
b.Debt/Total assets?

3-25....
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