Answer:
a. Return on stockholders' equity = 16.90%
b. New return on stockholders' equity = 18.62%
Explanation:
a. What is its return on stockholders' equity?
Assets turnover = Sales / Total assets ……………. (1)
Therefore, we have:
Total assets = Sales / Assets turnover = $4,030,000 / 4 = $1,007,500
Total liabilities = Current liabilities + Long-term liabilities = $140,000 + $343,000 = $483,000
Stockholders' equity = Total assets - Total liabilities = $1,007,500 - $483,000 = $524,500
Net income = Sales * Percentage earns on each dollar sales = $4,030,000 * 2.2% = $88,660
Return on stockholders' equity = Net income / Stockholders' equity = $88,660 / $524,500 = 0.1690, or 16.90%
b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.50, what will be the new return on stockholders' equity?
Based on equation (1) in part a above, we can have:
New sales = New total asset turnover * Total assets from part a above = 4.50 * $1,007,500 = $4,533,750
New net income = New sales * Percentage earns on each dollar sales = $4,533,750 * 2.2% = $99,742.50
New stockholders' equity = Stockholders' equity in part a above + (New net income - Net income in part a above) = $524,500 + ($99,742.50 - $88,660) = $535,582.50
New return on stockholders' equity = New net income / New stockholders' equity = $99,742.50 / $535,582.50 = 0.1862, or 18.62%
