Bus 332 Homework 5

1433 Words Apr 14th, 2016 6 Pages
1. [ROA and ROE models and Ratio Components] The Salza Technology Corporation successfully increased its “top line” sales from $375,000 in 2012 to $450,000 in 2013. Net income also increased as did the venture’s total assets. You have been asked to compare the financial performance between the two years.

Salza Technology Corporation Annual Income Statements (in $ Thousands) | 2012 | 2013 | Net sales | $375 | $450 | Less: Cost of goods sold | -225 | -270 | Gross profit | 150 | 180 | Less: Operating expenses | -46 | -46 | Less: Depreciation | -25 | -30 | Less: Interest | -4 | -4 | Income before taxes | 75 | 100 | Less: Income taxes | -20 | -30 | Net income | $ 55 | $70 | Cash dividends | $ 17 | $ 20 |
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Expand the 2013 ROA model discussed in Part A into an ROE model that includes financial leverage as measured by the equity multiplier. Use average owners’ or stockholders’ equity in your calculation. ROE model = Net income/Net sales x Net sales/Average total assets x Average total assets/Average stockholders’ equity = Net income/Average stockholders’ equity here: Average equity multiplier = Average total assets/Average stockholders’ equity From Part A: ROA model = 15.56% x 1.1111 = 17.28% Average total assets = ($345 + $465)/2 = $405 Note: Owners’ or stockholders’ equity = Common stock + Retained earnings 2012: $85 + $ 185 = $270 2013: $120 + $245 = $355 Common stock amounting to $35 in “net proceeds” ($120 - $85) was issued in 2013 Retained earnings increased by $50 in 20103($235 - $185) which resulted from a net income of $70 minus cash dividends paid of $20 Average stockholders’ equity = ($270 + $355)/2 = $625/2 = $312.50 ROE model= $15.56% x 1.1111 x ($405/$312.50) = 15.56% x 1.1111 x 1.2960 = 22.41%

D. Expand the 2012 and 2013 ROA model calculations in Part B into ROE models based on year-end owners’ or stockholders’ equity amounts.

ROA model from Part B:
2012: $55/$375 x $375/$345 = 14.67% x 1.0870 = 15.94%
2013: $70/$450 x $450/$465 = 15.56% x 0.9677 = 15.05%
ROE

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