Question

Assume the following data for Cable Corporation and Multi-Media Inc.

	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder’s equity	239,000	423,000

c. Discuss the factors from part b that added or detracted from one firm

having a higher return on stockholders’ equity than the other firm as

computed in part a.

Short answer

The return on stockholder’s equity of Multimedia Incorporation is more than that of Cable corporation because the return on the sales of Capable corporation has a higher return than Multimedia Incorporation (9.84% vs. 5.19%).

However, Multimedia Incorporation has a higher return than Capable corporation on total assets (14.51% versus 7.76%) because the total asset turnover of Multimedia Incorporation is more than that of the Cable Corporation (279.79% versus 78.86%). This factor alone leads to a higher return on total assets.

Step-by-step solution

Comparison of return on stockholder’s equity from part a

	Capable corporation	Multimedia Incorporation
Return on stockholder’s Equity	13.05%	33.10%

Return on stockholder’s equity of multimedia Incorporation is more than that of Capable corporation because the net income of multimedia incorporation is more than that of Capable corporation.

Comparison of other variables from part b

	Capable corporation	Multimedia Incorporation
Net income to sales	9.84%	5.19%
Net Income to total assets	7.76%	14.51%
Sales to total assets	78.86%	279.79%

Net income to sales of Multimedia incorporation is less than that of Capable corporation due to the increase in the sale of Multimedia incorporation.

Net income to total assets of multimedia incorporation is more than that of Capable corporation because the total assets of Multimedia incorporation are more than that of Capable corporation.

In addition, sales to total assets of Multimedia incorporation are more than that of Capable corporation because the net sales of Multimedia incorporation are more than that of Capable corporation.