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Excel Analytics 16-2 (Static) Return on Equity (ROE) [LO16-3, 16-4, 16-5]

Edman Company is a merchandiser that has provided the following balance sheet and income statement for this year.

		Beginning Balance			Ending Balance
Assets
Cash	$	62,800		$	150,000
Accounts receivable		160,000			180,000
Inventory		230,000			240,000
Property, plant & equipment (net)		833,000			793,000
Other assets		37,000			37,000
Total assets	$	1,322,800		$	1,400,000
Liabilities & Stockholders Equity
Accounts payable	$	70,000		$	80,000
Bonds payable		550,000			550,000
Common stock		410,000			410,000
Retained earnings		292,800			360,000
Total liabilities & stockholders equity	$	1,322,800		$	1,400,000

		This Year
Sales	$	2,500,000
Variable expenses:
Cost of goods sold		1,600,000
Variable selling expense		240,000
Total variable expenses		1,840,000
Contribution margin		660,000
Fixed expenses:
Fixed selling expenses		220,000
Fixed administrative expenses		300,000
Total fixed expenses		520,000
Net operating income		140,000
Interest expense (8%)		44,000
Net income before tax		96,000
Tax expense (30%)		28,800
Net income	$	67,200

Excel Analytics 16-2 (Static) Part 4

4. Refer to the Requirement 4 ROE Diagram tab within your template. For alternative 1, complete the diagram by using appropriate formulas and reference cells. (In some instances your formulas and reference cells will refer to the Requirement 3 Financials tab.)

a. Which choice shows the formulas used to compute the net operating income and average total assets?

b. What is this alternatives estimated net profit margin percentage, total asset turnover, equity multiplier, and return on equity (ROE)?

c. If the company pursues this alternative, would it cause next years ROE to be greater than, less than, or equal to this years ROE (as computed in requirement 2b)?