earns more profit per dollar of sales than Pepsi does. The return on assets ratio for Coke is much better than Pepsi, but Coke does appear to have a more risky capital structure because of its higher debt-to-equity ratio. Coke pays out a higher percentage of its earnings in dividends. AP13–4. Req. 1 Name and Computation of the 2015 Ratio Brief Explanation of the Ratio of profitability: (1) Return on equity: Measures return earned for owners $25,200 ÷ $109,000* = 23.1%. based upon their investment (including *($116,000 + $102,000) ÷ 2 = $109,000 retained earnings) in the business. (2) Return on assets: Measures the entity’s performance in ($25,200 + $4,900*) ÷ $187,500†= 16.1%. using total resources (total assets) available to it. *Bonds: $70,000 x 10% x .70 = $4,900 + $171,000) ÷ 2 = $187,500 †($204,000 (3) Financial leverage percentage: The advantage to be gained by 23.1% 16.1% = 7.0% positive investors when the interest rate (net of – tax) is less than the return on assets. (4) Earnings per share A measure of the return earned on $25,200 ÷ 10,000 shares = $2.52 each share of common stock outstanding. (5) Profit margin Indicates percent of each sales dollar $25,200 ÷ $453,000 = 5.6% that was represented by income. (6) Fixed asset turnover An indication of how efficiently $453,000 ÷ [($130,000 + $120,000) ÷ 2] = management is using fixed assets. 3.6
earns more profit per dollar of sales than Pepsi does. The return on assets ratio for Coke is much better than Pepsi, but Coke does appear to have a more risky capital structure because of its higher debt-to-equity ratio. Coke pays out a higher percentage of its earnings in dividends. AP13–4. Req. 1 Name and Computation of the 2015 Ratio Brief Explanation of the Ratio of profitability: (1) Return on equity: $25,200 ÷ $109,000* = 23.1%. *($116,000 + $102,000) ÷ 2 = $109,000 Measures return earned for owners based upon their investment (including retained earnings) in the business. (2) Return on assets: ($25,200 + $4,900*) ÷ $187,500†= 16.1%. Measures the entity’s performance in using total resources (total assets) available to it. *Bonds: $70,000 x 10% x .70 = $4,900 †($204,000 + $171,000) ÷ 2 = $187,500 (3) Financial leverage percentage: 23.1% – 16.1% = 7.0% positive The advantage to be gained by investors when the interest rate (net of tax) is less than the return on assets. (4) Earnings per share $25,200 ÷ 10,000 shares = $2.52 A measure of the return earned on each share of common stock outstanding. (5) Profit margin $25,200 ÷ $453,000 = 5.6% Indicates percent of each sales dollar that was represented by income. (6) Fixed asset turnover $453,000 ÷ [($130,000 + $120,000) ÷ 2] = 3.6 An indication of how efficiently management is using fixed assets.
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