Chapter 3, Problem 3.4ME

To determine

Concept Introduction:

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

Profit Margin = Net Income / Sales

Asset Turnover Ratio:

Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:

  $AssetTurnoverRatio =\frac{Sales}{Averagetotalassets}$

Return on Investment: The Return on Investment is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

Return on Investment = Net Income / Average Total Assets

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Return on Equity:

Return on Equity is the rate of return earned by the Stockholders on their investment in the company. It is calculated with the help of following formula:

  $\mathrm{Re}turnonEquity=\frac{NetIncome}{AverageStockholder’sEquity}$

The Average stock holder's equity calculated with the help of following formula:

  $Averagestockholder’sequity=\frac{( Beginningstockholder’sequity+Endingstockholder’sequity)}{2}$

To Calculate:

The Average Total Assets, Net Income, Return on investment, and Return on Equity for Firm M