Chapter 3, Problem 30P

a.

Summary Introduction

To determine: The affiliate for the Omni Technology Holding Company that has the highest return on sales.

Introduction:

Return on sales:

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is calculated by dividing the net income of the company by its sales.

Answer to Problem 30P

The foreign operation affiliate of the Omni Technology Holding Company has the highest return on sales.

Explanation of Solution

Calculation of the return on sales for software:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$2,086,000}{\$40,200,000}\\ =5.19\%\end{array}$

Calculation of the return on sales for personal computers:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$2,880,000}{\$60,080,000}\\ =4.79\%\end{array}$

Calculation of the return on sales for foreign operations:

$\begin{array}{c}\text{Return on sales}=\frac{\text{Net Income}}{\text{Sales}}\\ =\frac{\$8,510,000}{\$100,680,000}\\ =8.45\%\end{array}$

b.

Summary Introduction

To determine: The affiliate for the Omni Technology Holding Company that has the lowest return on assets.

Introduction:

Return on assets (ROA):

It is used to compute the ratio which shows the degree to which a company makes money from its business activities. It is computed by dividing the net income of a company by its sales.

Answer to Problem 30P

The personal computer affiliate of the Omni Technology Holding Company has the lowest ROA.

Explanation of Solution

Calculation of the ROA for software:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total assets}}\\ =\frac{\$2,086,000}{\$5,820,000}\\ =35.84\%\end{array}$

Calculation of the return on assets for personal computers:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total assets}}\\ =\frac{\$2,880,000}{\$25,790,000}\\ =11.17\%\end{array}$

Calculation of the return on assets for foreign operations:

$\begin{array}{c}\text{ROA}=\frac{\text{Net Income}}{\text{Total assets}}\\ =\frac{\$8,510,000}{\$60,630,000}\\ =14.04\%\end{array}$

c.

Summary Introduction

To determine: The affiliate for the Omni Technology Holding Company that has the highest total asset turnover.

Introduction:

Asset turnover:

It computes the competence of a firm in using its assets for the generation of the income or sales revenue for the firm.

Answer to Problem 30P

The software affiliate of the Omni Technology Holding Company has the highest return on asset turnover.

Explanation of Solution

Calculation of the return on total assets turnover software:

$\begin{array}{c}\text{Return on assets turnover}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$40,200,000}{\$5,820,000}\\ =6.91\text{x}\end{array}$

Calculation of the return on total assets turnover for personal computers:

$\begin{array}{c}\text{Return on assets turnover}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$60,080,000}{\$25,790,000}\\ =2.33\text{x}\end{array}$

Calculation of the return on total assets turnover for foreign operations:

$\begin{array}{c}\text{Return on assets turnover}=\frac{\text{Sales}}{\text{Total assets}}\\ =\frac{\$100,680,000}{\$60,630,000}\\ =1.66\text{x}\end{array}$

d.

Summary Introduction

To determine: The affiliate for the Omni Technology Holding Company that has the highest return on stockholder’s equity.

Introduction:

Return on stockholder’s equity:

It is the profitability ratio that computes the capability of a company to make profits out of the investments made by the shareholders in the company.

Answer to Problem 30P

The software affiliate of the Omni Technology Holding Company has the highest return on the stockholder’s equity.

Explanation of Solution

Calculation of the return on stockholder’s equity for software:

$\begin{array}{c}\text{Return on stockholder's equity}=\frac{\text{Net Income}}{\text{Stockholder's equity}}\\ =\frac{\$2,086,000}{\$4,090,000}\\ =51\%\end{array}$

Calculation of the return on stockholder’s equity for personal computers:

$\begin{array}{c}\text{Return on stockholder's equity}=\frac{\text{Net Income}}{\text{Stockholder's equity}}\\ =\frac{\$2,880,000}{\$10,170,000}\\ =28.32\%\end{array}$

Calculation of the return on stockholder’s equity for foreign operations:

$\begin{array}{c}\text{Return on stockholder's equity}=\frac{\text{Net Income}}{\text{Shareholder's equity}}\\ =\frac{\$8,510,000}{\$50,950,000}\\ =16.70\%\end{array}$

e.

Summary Introduction

To determine: The affiliate for the Omni Technology Holding Company that has the highest debt ratio.

Introduction:

Debt to Total Asset Ratio:

It shows the financial leverage of the company and the part of the assets of the company that are financed by the creditors.

Answer to Problem 30P

The personal computer affiliate of the Omni Technology Holding Company has the highest debt to total assets ratio.

Explanation of Solution

Calculation of the debt to total assets ratio for software:

$\begin{array}{c}\text{Debt total assets}=\frac{\text{Debt}}{\text{Total assets}}\\ =\frac{\$1,730,000}{\$5,820,000}\\ =29.73\%\end{array}$

Calculation of the debt to total assets ratio for personal computers:

$\begin{array}{c}\text{Debt total assets}=\frac{\text{Debt}}{\text{Total assets}}\\ =\frac{\$15,620,000}{\$25,790,000}\\ =60.57\%\end{array}$

Calculation of the debt to total assets ratio for foreign operations:

$\begin{array}{c}\text{Debt total assets}=\frac{\text{Debt}}{\text{Total assets}}\\ =\frac{\$9,680,000}{\$60,630,000}\\ =15.97\%\end{array}$

Working Notes:

Calculation of the debt for software:

$\begin{array}{c}\text{Debt}=\text{Assets}-\text{Shareholders equity}\\ =\$5,820,000-4,090,000\\ =\$1,730,000\end{array}$

Calculation of the debt for personal computers:

$\begin{array}{c}\text{Debt}=\text{Assets}-\text{Shareholders equity}\\ =\$25,790,000-10,170,000\\ =\$15,620,000\end{array}$

Calculation of the debt for foreign operations:

$\begin{array}{c}\text{Debt}=\text{Assets}-\text{Shareholders equity}\\ =\$60,630,000-50,950,000\\ =\$9,680,000\end{array}$

f.

Summary Introduction

To explain: The reason for the highest return on asset turnover of the software affiliate of the Omni Technology Holding Company.

Introduction:

Asset turnover:

It computes the competence of a firm in using its assets for the generation of the income or sales revenue for the firm.

Answer to Problem 30P

The software affiliate of the Omni Technology Holding Company has the highest return on asset because of the highest total asset turnover ratio.

Explanation of Solution

The software affiliate of the Omni Technology Company has a total asset turnover ratio that is 6.91 times. Thus, it has the highest asset turnover ratio compared to other affiliates.

g.

Summary Introduction

To explain: The reason for the higher returns on stockholder’s equity of personal computer affiliate as compared to foreign operations affiliate.

Introduction:

Return on stockholder’s equity:

It is the profitability ratio that computes the capability of a company to generate profits out of the investments made by the shareholders in the company.

Answer to Problem 30P

The personal computer affiliate has a return on shareholder’s equity higher than the foreign operations affiliate because it has a higher debt ratio compared to the foreign operations affiliate.

Explanation of Solution

The debt ratio of personal computer is 60.57% and the debt ratio of foreign operations affiliate is 15.97%. Thus, personal computer affiliate has a debt ratio higher as compared to the foreign affiliate. So, it gives higher returns on stockholder’s equity on the basis of its debt ratio.