Question

Network Communications has total assets of \(1,500,000 and current assets of \)612,000. It turns over its fixed assets three times a year. It has $319,000 of debt. Its return on sales is 8 percent. What is its return on stockholders’ equity?

Short answer

The return on stockholder’s equity of the company is 18.05%.

Step-by-step solution

Fixed assets of the company

$$\begin{gathered} Fixedassets=Totalasset-Currentasset \\ =\$1,500,000-\$612,000 \\ =\$888,000 \end{gathered}$$

Sales of the company

$$\begin{gathered} Sale=Totalfixedasset\times Fixedassetturnoverratio \\ =\$888,000\times 3 \\ =\$2,664,000 \end{gathered}$$

Net income of the company

$$\begin{gathered} Netincome=Sales\times Profitmargin \\ =\$2,664,000\times 8\% \\ =\$213,120 \end{gathered}$$

Stockholder’s equity of the company

$$\begin{gathered} Stockholder’sequity=Totalassets-Totaldebts \\ =\$1,500,000-\$319,000 \\ =\$1,181,000 \end{gathered}$$

Return on stockholder’s equity

$$\begin{gathered} Returnonstockholder’sequity=\frac{Netincome}{Stockholder’sequity} \\ =\frac{\$213,120}{\$1,181,000} \\ =18.05\% \end{gathered}$$