Pacific Fixtures lists the following accounts as part of itsbalance sheet. Total
ID: 2662562 • Letter: P
Question
Pacific Fixtures lists the following accounts as part of itsbalance sheet. TotalAssests 1,0000,000 Accountspayables 2,000,000 NotesPayables (8%) 1,000,000 Long Term Debt(10%) 3,000,000 Common Stock atPar 1,000,000 Contributed capital in excess ofpar 500,000 Reatinedearnings 2,500,000 Total Liablilties and stockholders'sequitry 10,000,000 Compute the return on stockholders' equity if the company hassales of $20 million and the following net profit million and thefollowing net profit margin: a) 3 percent b) 5 percent Pacific Fixtures lists the following accounts as part of itsbalance sheet. TotalAssests 1,0000,000 Accountspayables 2,000,000 NotesPayables (8%) 1,000,000 Long Term Debt(10%) 3,000,000 Common Stock atPar 1,000,000 Contributed capital in excess ofpar 500,000 Reatinedearnings 2,500,000 Total Liablilties and stockholders'sequitry 10,000,000 Compute the return on stockholders' equity if the company hassales of $20 million and the following net profit million and thefollowing net profit margin: a) 3 percent b) 5 percentExplanation / Answer
(a) The formula for calculating Return onshareholder’s equity or simply Return on equity is
ROE = Net Income / Average shareholder’sequity
Calculating 3% net profit on sales, we get
Net profit = 3% on $20,000,000 = $600,000
Shareholder’s equity = Common stock + Paid-in capital +Retained earnings
= $1,000,000+ $500,000 + $2,500,000
=$4,000,000
Substituting these values in the above formula, we get
ROE = $600,000/$4,000,000 = 15%
(b) Now calculating 5% on sales, we get
Net profit = 5% on $20,000,000 = $1,000,000
Substituting this value in the above formula, we get
ROE = $1000000/$4000000 = 25%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.