"3-24. (Continued)b. The increasing return on assets over time is due solely to thefact that annual depreciation charges reduce the amount ofinvestment. The increasing return is in no way due tooperations.Financial analysts should be aware of the effect of overallasset age on the return-on-investment ratio and be able tosearch elsewhere for indications of operating efficiency whenROI is very high or very low.c. As income rises, return on assets will be higher than in part(b) and would indicate an increase in return partially frommore profitable operations.S3-35 25. Calloway Products has the following data. Industry information is also shown. Industry Data on NetYear Net Income Total Assets Income/Total Assets2006 $360,000 $3,000,000 11%2007 380,000 3,400,000 82008 380,000 3,800,000 5 Industry Data onYear Debt Total AssetsDebt/Total Assets2006 $1,600,000 $3,000,000 52%2007 1,750,000 3,400,000 402008 1,900,000 3,800,000 31As an industry analyst comparing the firm to the industry, are you likely to praise orcriticize the firm in terms of: a. Net income/Total assets? b. Debt/Total assets?3-25. Solution:Calloway Productsa. Net income/total assetsYear Calloway Ratio Industry Ratio2006 12.0% 11.0%2007 11.18% 8.0%2008 10.0% 5.0% Although the company has shown a declining return on assetssince 2006, it has performed much better than the industry.Praise may be more appropriate than criticism.S3-36 3-25. (Continued)b. Debt/total assetsYear Calloway Ratio Industry Ratio2006 53.33% 52.0%2007 51.47% 40.0%2008 50.0% 31.0%While the company ?s debt ratio is im improving nearly as rapidly as the industry ratio. Criticismmay be more appropriate than praise.26. Jodie Foster Care Homes, Inc., shows the following data:Year Net Income Total Assets Stockholders ? EqT uit ot yal Debt2005 $118,000 $1,900,000 $ 700,000 $1,200,0002006 131,000 1,950,000 950,000 1,000,0002007 148,000 2,010,000 1,100,000 910,0002008 175,700 2,050,000 1,420,000 630,000 a. Compute the ratio of net income to total assets for each year and comment on the trend. b. Compute the ratio of net income to stockholders ? equity and com Explain why there may be a difference in the trends between parts a and b.3-26. Solution:Jodie Foster Care Homes, Inc.Net income a. Total assets 2005$118,000/$1,900,000 = 6.21%2006$131,000/$1,950,000 = 6.72%2007$148,000/$2,010,000 = 7.36%2008$175,700/$2,050,000 = 8.57%Comment: There is a strong upward movement in return onassets over the four year period.S3-37 3-26. (Continued)Net income b. Stockholders' equity 2005$118,000/$700,000= 16.86%2006$131,000/$950,000= 13.79%2007$148,000/$1,100,000 = 13.45%2008$175,700/$1,420,000 = 12.37%Comment: The return on stockholders ? equity ratdown each year. The difference in trends between a and b isdue to the larger portion of assets that are financed bystockholders ? equity as opposed to debt. Optional: This can be confirmed by computing total debt tototal assets for each year.Total debt Total assets 200563.2%200651.3%200745.3%200830.7%S3-38 27. The United World Corporation has three subsidiaries. Computers Magazines Cable TVSales ....................................... $16,000,000 $4,000,000 $8,000,000Net income (after taxes) ......... 1,000,000 160,000 600,000Assets ..................................... 5,000,000 2,000,000 5,000,000. a. Which division has the lowest return on sales? b. Which division has the highest return on assets? c. Compute the return on assets for the entire corporation. d. If the $5,000,000 investment in the cable TV division is sold off and redeployed inthe computer division at the same rate of return on assets currently achieved in thecomputer division, what will be the new return on assets for the entire corporation?3-27. Solution:United World CorporationComputers Magazines Cable TV a. Net income/sales 6.25% 4.00% 7.50% The magazine division has the lowest return on sales.Computers Magazines Cable TV b. Net income/total assets 20.0% 8.00% 12.00% The computer division has the highest return on assets.Corporate net income $1,000,000++ $160,000 $600,000 = c.Corporate total assets $5,000,000++ $2,000,000 $5,000,000 $1,760,000 = $12,000,000 =14.67% S3-39 "