Question

Neon Light Company has $1,000,000 in assets and $600,000 of debt. It reports net income of $100,000.A) What is the return on the assets?
B) What is the return on the stockholders' equity?
C) If the firm has an asset turnover ratio of 3 times, what is the profit margin (return on sales)?

Answer 1

Answer:

a. 10%

b. 25%

c. 3.3%

Explanation:

return on the assets = net income / total assets = $100,000 / $1,000,000 = 0.1 =  10%

return on the stockholders' equity = net income / total equity

Equity = Assets - liabilities =  $1,000,000 =  $600,000 =  $400,000

return on the stockholders' equity = $100,000 / $400,000 = 0.25 = 25%

profit margin = Net income / Revenue

asset turnover ratio = Revenue / total assets

3 = Revenue / $1,000,000

Revenue = $1,000,000 x 3 = $3,000,000

$100,000 / $3,000,000 = 0.033 = 3.3%