
To compute:
The following ratios for this year and last year −

Answer to Problem 19P
Solution:
Ratios | This year | Last Year | |
a | Gross margin | 22.50% | 20.67% |
b | Net margin percentage | 5.60% | 4.51% |
c | Return on total assets | 12.10% | 10.10% |
d | Return on equity | 18.48% | 13.75% |
e | Financial Leverage | Positive | Positive |
Explanation of Solution
The above answers can be explained as under −
Gross margin percentage = 22.5 %
For last year − Given
- Sales = $ 4,350,000
- Gross margin = $ 900,000
Gross margin percentage = 20.67 %
For last year − Given
- Sales = $ 4,350,000
- Net profit margin = $ 196,000
For last year − Given,
- Net Income = $ 196,000
- Beginning total assets = $ 2,420,000
- Ending total assets = $ 2,460,000
- Interest Expense = $ 72,000
- Tax Rate = 30 %
For last year − Given,
- Net Income = $ 196,000
- Beginning Stockholder’s equity = $ 1,420,000
- Ending stockholder’s equity = $ 1,430,000 Now, average stockholder’s equity −
Thus, all the ratio for requirements 2 have been calculated.
Requirement 3
To comment:
Company’s profit performance and Stock market performance

Answer to Problem 19P
Solution:
The profit ratios showed an increasing trend and earnings per share also increased. The price earnings ratio declined from last year. The return on total assets and return on equity also increased from last year. The price earnings ratio per share decreased from 9.18 to 7.14. But the market price of the share increased from last year.
It can be said that stock price will have potential growth in future years.
Explanation of Solution
The above observations can be explained as, the profitability ratio improved from last year to this year. This signifies that there is an increase in the profit earning efficiency of the company. Further, the other stock ratios like, earnings per share, dividend yield ratio, book value per share also increased, explaining that the stock of the company will have potential growth in the future years.
The dividend pay-out ratio decreased. The reason may be company is planning to pay less as dividend and utilize the retained income for future growth.
Thus, the observations on the profitability and stock performance have been explained.
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Chapter 15 Solutions
Connect 1-Semester Access Card for Managerial Accounting
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