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Problem 1. The following are extracted from the financial statements of Frem, Inc., for 2006, 2005, and 2004. 2006 2005 2004 Net sales $233,000 $204,000

Problem 1. The following are extracted from the financial statements of Frem, Inc., for 2006, 2005, and 2004. 2006 2005 2004 Net sales $233,000 $204,000 Cost of sales (124,000) (110,000) Selling and administrative expenses (95,000) (81,500) Other income: Interest (3,700) (3,050) Other 100 1,175 Earnings before tax and extraordinary credit $ 10,400 $ 10,625 Provision for income tax (4,800) (4,740) Earnings before extraordinary credit 5,600 5,885 Extraordinary credit 1,510 $ 5,600 $ 7,395 Total assets $202,000 $173,000 $161,000 Long-term debt 24,600 17,400 15,200 Common equity 123,000 116,800 112,800 Preferred stock 4,000 4,000 4,000 Preferred dividends 280 280 280 Required: a. Compute the following ratios for 2006 and 2005. 1. Net profit margin 2. Total asset turnover 3. Return on assets 4. Return on investment 5. Return on total equity 6. Return on common equity 7. Gross profit margin b. Discuss the trend in profitability and identify specific causes for the trend. ANS: a. 2006 2005 1. Net Profit Margin = Net Income Before Minority Share of Earnings and Nonrecurring Items Net Sales 2. Total Asset Turnover = Net Sales Average Total Assets 3. Return On Assets = Net Income Before Minority Share of Earnings and Nonrecurring Items Average Total Assets 4. Return On Investment = Net Income Before Minority Share of Earnings and Nonrecurring Items + (Interest Expense) (1 - Tax Rate) Average (Long-Term Liabilities + Equity) 5. Return on Equity = Net income before nonrecurring Items - Dividends on Redeemable Preferred Stock Average Total Equity 6. Return on Common Equity = Net Income Before Nonrecurring Items - Preferred Dividends Average Common Equity 7. a. Gross Profit Margin = b.

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