Use the information in the table below to answer the following questions. Net pr

Question

Use the information in the table below to answer the following questions.

Net profit = 826.32

a. Calculate Windswept Woodworks’ return on equity for year 2. (Round your answer to 2 decimal places.)

ROE            

Calculate the following items for Windswept Woodworks for year 2. (Round your answers to 2 decimal places.)

b. Profit margin            

c. Tax burden ratio            

d. Interest burden ratio            

e. Asset turnover ratio            

f. Leverage ratio            

Windswept Woodworks, Inc. Input Data (millions of dollars) Year 2 Year 1 Accounts payable 508 444 Accounts receivable 1,352 890 Accumulated depreciation 6,818 6,692 Cash & equivalents 296 188 Common stock 1,256 1,180 Cost of goods sold 1,500 n.a. Depreciation expense ? n.a. Common stock dividends paid ? n.a. Interest expense 140 n.a. Inventory 1,086 1,086 Addition to retained earnings 602 n.a. Long-term debt 884 796 Notes payable 230 380 Gross plant & equipment 10,260 10,000 Retained earnings 3,134 2,536 Sales 3,018 n.a. Other current liabilities 116 96 Tax rate 34 % n.a. Market price per share – year end $ 19.80 $ 17.50 Number of shares outstanding 500 million 500 million

Explanation / Answer

a)

ROE = Net profit / Average equity

Average equity = (1256 + 1180)/2 = 1218

ROE = 826.32 / 1218 = 67.84%

b)

Profit margin = Net profit / Sales

Profit margin = 826.32 / 3018 = 27.38%

c)

Tax burden ratio = Net profit / EBT

EBT = Net profit / (1-tax rate)

EBT = 826.32 / 0.66 = 1252

Tax burden ratio = (1-tax rate) = 1-34% = 66%

d)

Interest burden ratio = EBT / EBIT

Interest expense = 140

EBIT = EBT + Interest expense

EBIT = 1252 + 140 = 1392

Interest burden ratio = 1252 / 1392 = 89.94%

e)

Asset turnover ratio = Sales / Avg. Assets

Assets = Receivables + Cash + Inventory + Gross PPE - Accumulated Depreciation

Assets year 2 = 1352 + 292 + 1086 + 10260 - 6818 = 6172

Assets year 1 = 890 + 188 + 1086 + 10000 - 6692 = 5472

Average equity = (6172 + 5472)/2 = 5822

Asset turnover ratio = 3018 / 5822 = 51.84%

f)

Leverage ratio = Avg. Assets / Equity

Leverage ratio = 5822 / 1218 = 4.78

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