Question

The following information is from the 20X1 annual report of Weber Corporation, a company that supplies manufactured parts to the household appliance industry. Average total assets $ 24,500,000 Average interest-bearing debt 10,000,000 Average other liabilities 2,250,000 Average shareholders' equity 12,250,000 Sales 49,000,000 Interest expense 400,000 Net income 2,450,000 Required: Compute Weber Corporation’s return on assets (ROA) for 20X1 using a combined federal and state income tax rate of 25% where needed. Compute the profit margin and asset turnover components of ROA for 20X1. Weber’s management believes that various business initiatives will produce an asset turnover rate of 2.25 next year. If the profit margin next year is unchanged from 20X1, what will be the company’s ROA?

Answer 1

Answer:

ROA for 20X1= 10%

Profit margin for 20X1= 5%

Assets turnover= 2

ROA for the coming year= 11.25%

Explanation:

Weber corporation return on assets for 20X1 can be calculated as follows

ROA= Net income/Average total assets × 100

= 2,450,000/24,500,000 × 100

= 0.1 × 100

= 10%

The profit margin can be calculated as follows

= Net income/sales × 100

= 2,450,000/49,000,000 × 100

= 0.05 × 100

= 5%

The assets turnover ratio can be calculated as follows

= Sales/Average Total assets

= 49,000,000/24,500,000

= 2

The company ROA if when the turnover rate for next year is2.25 and the profit margin remain unchanged can be calculated as follows

= profit margin × assets turnover ratio

= 5% × 2.25

= 11.25%