Question

EXERCISE 15-9 Financlal Ratios for Assessing Profitablity and Managing Debt LO15-4, LO15-5 Refer to the financial statements for Castile Products, Inc., in Exercise 15-8. Assets at the begin- ning of the year totaled $280,000, and the stockholders' equity totaled $161,600. Required: Compute the following: 1. Gross margin percentage. Net profit margin percentage. 3. 2. Return on total assets. Return on equity. Was financial leverage positive or negative for the year? Explain. 4. 5.

Answer 1

Gross margin percentage = 30%

Net profit margin percentage = 5%

Return on total assets = 13%

Return on equity = 13%

Financial leverage = 0.76

Financial leverage positive for the year and explanation is given below

Step-by-step explanation:

Gross margin percentage = Gross margin ÷ Sales

= $127,500 ÷ $420,000

= 30%

Net profit margin percentage = Net income ÷ Sales

= $21,000 ÷ $420,000

= 5%

Return on total assets = Earning before interest and taxes ÷ Total sales

= $38,000 ÷ $300,000

= 13%

Return on equity = Net income ÷ Average Stockholder equity

= $21,000 ÷ ($161,600 + $170,000 ÷ 2)

= $21,000 ÷ $165,800

= 13%

Financial leverage = Total debt ÷ Shareholder equity

= $130,000 ÷ $170,000

= 0.76

Therefore, Financial leverage positive for the year and higher is lesser than a lower ratio. So, we have liabilities which is lesser than assets and company is having good financial leverage.