Calculating the Net Profit Margin of Williams Oil Company Essay

Calculating the Net Profit Margin of Williams Oil Company

Net profit margin (npm) can be calculated by using the total equity that is possessed by stockholders (se) and dividing that quantity (or percentage) by the total sales (ts) achieved within the company. These sales can be derived by finding the total asset turnover (tat) and then multiplying by the equity multiplier (em). Therefore,

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                                   Total sales = tat x em.

The calculation of the net profit margin is therefore carried out by the following process:

                        npm     =                      se_______

                                                      total sales

                                    =                     se_______

                                                      tat x em

In this problem, the formula translates to                  18%_______  =      18%_  =      9%

                                                                               1.0 x 2.0                      2

The net profit margin is therefore equal to 9%, and this leads to the conclusion that 9 percent of every dollar earned through sales remains in the possession of the company after all costs have been accounted for.

APPALACHIAN REGISTERS INC.

Sales: $50 million (expected to increase by 50% to $75 million)

Expected change in sales: $25 million

Assets

Accounts Receivable: $10 million (expected to increase by 50% to $15 million)

Inventories: $15 million (expected to increase by 50% to .

5 million)

Net fixed assets: $20 million (expected to increase by 50% to $30 million)

Total Assets: $45 million

Liabilities

Accounts payable: $10 million (expected to increase by 30% to $13 million)

Forecasted Sales $75 million

Equity

Cash balance: $2 million

Net earnings: $10 million (after taxes)

Profit Margin

Net earnings/sales = 10/75 million = 13% (0.13)

Dividends $1 million = 10% (0.1)

Finding external financing required:

(Assets/Sales x ∆ Sales) – (Liabilities/Sales x ∆ Sales) – (Profit margin x Sales x (1- dividends)

(45,000,000/50,000 x 25,000,000) – (13,000,000/75,000,000 x 25,000,000) – (10,000,000/75,000,000 x 75,000,000 x (1-0.1) =

= .9(25,000,000) – 0.173(25,000,000) – 0.13(75,000,000)(.9)

= 22,500,000 – 4,330,000 – 9,000 ,000

= 9,170,000

Therefore, External financing required is $9,170,000

Reference

Evans, M. (2000). “Financial planning and forecasting.” Excellence in Financial Management.   Retrieved on August 30, 2007 from www.exinfm.com/training/course02.doc

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