Please include as much detail as possible to assist my understanding. 3. Ratio A
ID: 2426011 • Letter: P
Question
Please include as much detail as possible to assist my understanding.
3. Ratio Analysis The 2015 income statement for Anderson TV and Appliance reported sales revenue of $492000 and net income of $67500. Average total assets for 2015 was $811000. Shareholders' equity at the beginning of the year was $453000 and $19000 was paid to shareholders as dividends. There were no other shareholders' equity transactions that occurred during the year. . Calculate the profit margin on sales, return on assets, and return on shareholders' equity for 2015 Calculate the profit margin on sales, return on assets, and return on shareholders' equity for 2015. ·Show the DuPont frameworks calculation of the three components of the 2015 return on shareholders' equity for Anderson TV and Appliance.Explanation / Answer
Profit margin on sales (%) =Net profit/Sales *100=67500/492000*100=13.72%
Return on assets=Net income/Average total assets=67500/811000*100=8.32 %
Return on shareholder’s equity=Net income/Shareholder’s equity =67500/453000*100=14.90%
Du Pont analysis-Profit Margin =Profit/Sales=67500/492000*100=13.72%
Du Pont analysis asset turnover=Sales/Assets=492000/811000*100=60.66 %
Du Pont analysis equity multiplier=Assets/Equity=811000/453000*100=179.02%
Explanation:
DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)