CHAPTER 8

P 8-1 Ahl Enterprise lists the following data for 2011 and 2010:
2011 2010
Net income $ 52,500 $ 40,000
Net sales 1,050,000 1,000,000
Average total assets 230,000 200,000
Average common equity 170,000 160,000
Required Calculate the net profit margin, return on assets, total asset turnover, and return
on common equity for both years. Comment on the results. (For return on assets and total
asset turnover, use end-of-year total assets; for return on common equity, use end-of-year
common equity

Net Profit Margin =

Net Income Before Minority Share of Earnings and Nonrecurring Items/Net Sales
2011 2010
$52,500 /$1,050,000 $40,000/$1,000,000
= 5.00% = 4.00%
Return on Assets =
Net Income Before Minority Share of Earnings and Nonrecurring Items/Average Total Assets
2011 2010
$52,500/$230,000 $40,000/$200,000

= 22.83% = 20.00%192
Total Asset Turnover =Net Sales /Average Total Assets
2011 2010
$1,050,000/$230,000 $1,000,000/$200,000
=4.57 times per year =5.00 times per year
Return on Common Equity =
Net Income Before Nonrecurring
Items – Preferred Dividends/Average Common Equity
2011 2010
$52,500 /$170,000 $40,000/$160,000

= 30.88% = 25.00%
Ahl Enterprise has had a substantial rise in profit to sales. This is somewhat tempered by a reduction
in asset turnover. Given a slight rise in common equity, there is a substantial rise in return on
common equity.

Q2. The balance sheet for Schultz Bone Company at December 31, 2011 had the following account
balances:
Total current liabilities (non-interest-bearing) $450,000
Bonds payable, 6% (issued in 1982; due in 2018) 750,000
Preferred stock, 5%, $100 par 300,000
Common stock, $10 par 750,000
Premium on common stock 150,000
Retained earnings 600,000
Income before income tax was $200,000, and income taxes were $80,000 for the current year.
Required Calculate each of the following:
a. Return on assets (using ending assets)
b. Return on total equity (using ending total equity)
c. Return on common equity (using ending common equity)
d. Times interest earned

Earnings before interest and tax $245,000

Interest (750,000 x 6%) 45,000
Earnings before tax $200,000
Tax 80,000
Net income $120,000
Preferred dividends 15,000
Income available to common $105,000
a. Return on Assets =
Net Income Before Minority Share of
Earnings Equity Income and
Nonrecurring Items/ Average Total Assets = $120,000/$3,000,000
= 4.00%
b. Return on Total Equity =
Net Income Before Nonrecurring
Items – Dividends on
Redeemable Preferred Stock/ Average Total Equity = $120,000/$1,800,000
= 6.67%
c. Return on Common Equity =
Net Income Before Nonrecurring Items –Preferred Dividends/ Average Common Equity
$120,000 – $15,000/$1,500,000
= 7.00%
d. Times Interest Earned =Recurring Earnings, Excluding Interest Expense, Tax Expense Equity
Earnings, and Noncontrolling Interest/ Interest Expense, Including Capitalized Interest
= $245,000/ $45,000 = 5.44 times per year
Dorex, Inc., presented the following comparative income statements for 2011, 2010,
and 2009: For the Years Ended
2011 2010 2009
Net sales $1,600,000 $1,300,000 $1,200,000
Other income 22,100 21,500 21,000
1,622,100 1,321,500 1,221,000
Costs and expenses:
Material and manufacturing costs of products sold 740,000 624,000 576,000
Research and development 90,000 78,000 71,400
General and selling 600,000 500,500 378,000
Interest 19,000 18,200 17,040
Other 14,000 13,650 13,800
$1,463,000 $1,234,350 $1,143,240
or the Years Ended
2011 2010 2009
Earnings before income taxes and noncontrolling
Interest $159,100 $87,150 $77,760
Provision for income taxes 62,049 35,731 32,659
Earnings before noncontrolling interest 97,051 51,419 45,101
Noncontrolling interest 10,200 8,500 8,100
Net earnings 86,851 42,919 37,001
Other relevant financial information:
Average common shares issued 29,610 29,100 28,800
Average long-term debt $ 211,100 $ 121,800 $ 214,000
Average stockholders’ equity (all common) 811,200 790,100 770,000
Average total assets 1,440,600 1,220,000 1,180,000
Average operating assets 1,390,200 1,160,000 1,090,000

Required
a. Calculate the following for 2011, 2010, and 2009:
1. Net profit margin
2. Return on assets
3. Total asset turnover
4. DuPont analysis
5. Operating income margin
6. Return on operating assets
7. Operating asset turnover
8. Return on total equity
b. Based on the previous computations, summarize the trend in profitability for this firm

a. 1. Net Profit Margin =

Net Income Before Noncontrolling Interest,
Equity Income and Nonrecurring Items/ Net Sales

2011 2010 2009

$97,051/ $1,600,000 $51,419/$1,300,000 $45,101/$1,200,000
= 6.07% = 3.96% = 3.76

2. Return on Assets =Net Income Before Noncontrolling Interest and Nonrecurring Items/Average
Total Assets

2011 2010 2009

$97,051 /$1,440,600 $51,419/ $1,220,000 $45,101/$1,180,000
= 6.74% = 4.21% = 3.82%

3. Total Asset Turnover = Net Sales/Average Total Assets

2011 2010 2009
$1,600,000/ $1,440,600 $1,300,000 /$1,220,000 $1,200,000/$1,180,000
= 1.11 times per year = 1.07 times per year = 1.02 times per year

4. DuPont Analysis
Return on Assets = Net Profit Margin x Total Asset Turnover
2011: 6.74% = 6.07% x 1.11 times
2010: 4.24%* = 3.96% x 1.07 times
2009: 3.84%* = 3.76% x 1.02 times

Operating Income Margin = Operating Income/ Net Sales

2010 2009 2011

(2) Net sales $1,600,000
$1,300,000 $1,200,000
Less: Material and manufacturing costs of products sold 740,000
624,000 576,000
Research and development 90,000
78,000 71,400
General and selling 600,000
500,500 65,000
 $1,430,000

$1,202,500

$1,112,400
(1) Operating income $ 170,000
$ 97,500 $ 87,600
(1) Divided by (2) 10.63%
7.50% 7.30%

Return on Operating Assets =Operating Income/Average Operating Assets

2011 2010 2009
Operating Income $170,000 $97,500 $87,000
Average Operating Assets $1,390,200 $1,160,000 $1,090,000
= 12.23% = 8.41% = 7.98%

Operating Asset Turnover =Net Sales/Average Operating Assets

2011 2010 2009
Net Sales $1,600,000 $1,300,000 $1,200,000
Average Operating Assets $1,390,200 $1,160,000 $1,090,000
= 1.15 times = 1.12 times = 1.10 times

Return on Total Equity =Net Income Before Nonrecurring Items –Dividends on Redeemable Preferred
Stock/Average Total Equity
2011 2010 2009
Net income etc. $ 86,851 $ 42,919 $ 37,001
Average total equity $ 811,200 $790,100 $ 770,000
=10.71% = 5.43% = 4.81
b. All ratios computed indicate a significant improvement in profitability