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    Knowledge about Ratios

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    1. A company has annual sales of 500,000,000 maintains a net after tax profit margin of 5% and has a sales-to-assets ratio of 4.
    a. What is its return on assets?
    b. If its debt/equity ratio is 0.5,what is the return on equity?

    2. On average, Microlimp's accounts receivables total$40,000,000 on annual sales of $400 million.
    What is Microlimp's average collection period?
    3. How would the following actions affect a firm's current ratio?
    a. Inventory is purchased and paid for with cash, it is not purchased on account.
    b. The firm takes out a short term bank loan to pay its overdue accounts payable.
    c. A customer prepays in full for specially ordered merchandise that it will take 60 days to manufacture.
    d. Inventory is sold at the firm's normal 35% markup over cost.

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    Solution Preview

    1. A company has annual sales of 500,000,000 maintains a net after tax profit margin of 5% and has a sales-to-assets ratio of 4.
    a. What is its return on assets?

    Return on Assets = Net Income/Total Assets
    Net after tax profit margin = Net Income/sales = 5%
    Net Income = 5% X 500,000,000 = 25,000,000
    Sales/Assets = 4
    Assets = Sales/4 = 500,000,000/4 = 125,000,000
    Return on Assets = 25,000,000/125,000,000 = 20%

    b. If its debt/equity ratio is 0.5,what is the return on equity?

    Debt/Equity = 0.5
    Total Assets = Debt + Equity
    Debt + Equity = ...

    Solution Summary

    The solution explains the calculation of various ratios and the impact on current ratio of the given transactions.

    $2.49

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