Question

The following information is from the 2017 annual report of Weber Corporation, a company that supplies manufactured parts to the household appliance industry.

Average total assets $24,500,000
Average interest-bearing debt 10,000,000
Average other liabilities 2,250,000
Average shareholders' equity 12,250,000
Sales 49,000,000
Interest expense 800,000
Net income 2,450,000

Required:

a. Compute Weber Corporationâs return on assets (ROA) for 2017 using a combined federal and state income tax rate of 40% where needed.
b. Compute the profit margin and asset turnover components of ROA for 2017.
c. Weberâs management believes that various business initiatives will produce an asset turnover rate of 2.25 next year. If the profit margin next year is unchanged from 2017, what will be the companyâs ROA?

Answer 1

Answer and Explanation:

The computation is shown below:

a The return on assets is

= Net profit before interest after tax ÷ average total assets

= ($2,450,000 + $800,000 × (1 - 0.40)) ÷ ($24,500,000)

= 11.96%

b. The profit margin is

= Net profit before interest after tax ÷ sales

= ($2,450,000 + $800,000 × (1 - 0.40)) ÷ ($49,000,000)

= 5.98%

The asset turnover is

= Sales ÷ average total assets

= $49,000,000 ÷ $24,500,000

= 2 times

c. The return on assets

= Profit margin × total assets

= 2.25 × 5.98%

= 13.455%