Problem 3-16 Du Pont system of analysis [LO3] Jerry Rice and Grain Stores has $4

Question

Problem 3-16 Du Pont system of analysis [LO3]

Jerry Rice and Grain Stores has $4,630,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 3.0 times per year. It has $197,000 in current liabilities and $313,000 in long-term liabilities.

What is its return on stockholders’ equity? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.00, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Jerry Rice and Grain Stores has $4,630,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 3.0 times per year. It has $197,000 in current liabilities and $313,000 in long-term liabilities.

Explanation / Answer

a) Nwt Income = Sales x Profit Margin

                  = 4630000 x 3.5 % = 162050

Shareholders Equity = Total Assets - Total Liablities

Total Assets = Sales/ Total Assets Trunover = 46300000/ 3 = 1543333

total Liabilities = CL+LT Liabilities = 197000+313000 = 510000

Stakw holderz sEquity = 1543333- 510000= 1033333

Return on Sh. Eq = Net Income/ Sh. Equity = 162050/ 1033333= 15.68%

b) Sales = Total Assets X Total Assets Turnover = 1543333 x 4 = 6173332

Net Income = Sales X Profi Margin = 6173332 X 3.5 % = 216066.62

Return on Eq = Net Income / Sh. Eq. = 216066.62/ 1033333

= 20.90 %

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