I can’t seem to figure this one out (from Schweser book 6). The following data pertains to a company’s common-sized financial statements. Current assets = 40% Total debt = 40% Net income = 16% Total assets = 2,000 Sales = 1,500 Total asset turnover ratio 0.75 No preferred stock in capital structure. The company’s after tax return on common equity is: A. 15% B. 16% C. 20% D. 25% Also, I don’t know if anyone can help but I only have the answers (without explanations) for Book 6, which is making reviewing my mistakes very hard! Thanks.
C? NI = 16% * 1500 = 240 Equity = TA - TL =2000 - 800= 1200 240/1200 = 0.2
Got TL by taking 2000 * 40%(total debt)
Total Assets = 2000 = (Total Liabilities + Common Equity) total Debt = 40% so Debt = 40% * 2000 = 800 So Equity = 1200 NI = 16% * 1500 (Common size statement on Income statement is based on Net Sales). So NI = 240 240/1200 = 20% Choice C
D… 240 of the 1200 is net income… not common equity 240 / (1200-240) = .25
C. CPK is right as always apcarlso, I don’t think net income appears on balance sheets…
apcarlso- The Net Income is added to retained earnings, which is considered common equity. I have yet to see a question asked in this way where the Net Income is not included in the common equity. Someone please tell me if I am wrong. Thanks.
yep finance03…you have explained what I was trying to say perfectly.=)
C as well you can do it as cpk or sales/assets=0.75 net income/ sales=16% equity multiplier=1/0.6=1.67 just multiply them and you get the same answer
in which exam of Schweser book 6 was this question on? Thanks CP
For (Common Sized) Balance Sheets we always use Total Assets TA = 2000 TL = 40% * TA TL = 0.40*2000 = 800 TE = TA - TL = 2000 - 800 TE = 1200 ROE = NI/TE For (Common Sized) Income Statements we always use Sales figure NI = 16% * Sales NI = 0.16*1,500 = 240 ROE = 240/1200 = 0.2 = 20% = C Now that’s an easy one… - Dinesh S
If RE is in common equity, then I agree with C. Thanks for the heads up Finance03.
In many of the Cash flow questions Change in Retained Earnings is provided, Dividend paid is provided and you are expected to calculate New Common Stock issued. So RE Before + NI - Dividend + Common Stock issued = RE After.
cpk123, could you put an example?
The example that I solved this morning for konstantin… is one such one. konstantin has KINDLY bumped the message just now… for everyone to see.
C is correct. I spaced out on the fact that common sized meant that 40% was 40% of either assets or liab + equity. Thanks everyone. I’m sure I’ll have more questions to post soon!
Oh and its Q53, book 6, morning session 1
cpk123, it’s not retained earnings account, it’s common equity account which consists of common stocks and retained earnings.
sorry, my bad.