   Chapter 17, Problem 18E

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# Profitability ratiosRalph Lauren Corporation sells apparel through company-owned retail stores. Recent financial information for Ralph Lauren follows (in thousands): Assume that the apparel industry average return on total assets is 8.0% and the average return on stockholders’ equity is 10.0% for the year ended April 2, Year 3. a. Determine the return on total assets for Ralph Lauren for fiscal Years 2 and 3. Round percentages to one decimal place. b. Determine the return on stockholders’ equity for Ralph Lauren for fiscal Years 2 and 3. Round percentages to one decimal place. c. Evaluate the two-year trend for the profitability ratios determined in (a) and (b). d. Evaluate Ralph Lauren’s profit performance relative to the industry.

a)

To determine

Determine Return on total assets for RL for fiscal years 2 and 3.

Explanation

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Return on assets determines the particular company’s overall earning power. It is determined by dividing sum of net income and interest expense and average total assets.

Formula:

Rate of return on assets=Netincome + Interest expenseAverage total assets

Determine return on total assets.

Fiscal year 3:

Rate of return on assets=Netincome + Interest expenseAverage total assets=$567,600+$18,300$4,815,000=12.2% Fiscal year 2: Rate of return on assets=Netincome + Interest expenseAverage total assets=$479,500+$22,200$4,502,700=11

b)

To determine

Determine return on stockholders’ equity.

c)

To determine

Evaluate two-year trend for the profitability ratios.

d)

To determine

Evaluate RL’s profit performance relative to the industry.

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