Question

10.

1. Six Measures of Solvency or Profitability

   The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

   Property, plant, and equipment (net)						$2,127,400
   Liabilities:
   	Current liabilities			$194,000
   	Note payable, 6%, due in 15 years			967,000
   	Total liabilities					$1,161,000
   Stockholders' equity:
   	Preferred $4 stock, $100 par (no change during year)					$1,161,000
   	Common stock, $10 par (no change during year)					1,161,000
   Retained earnings:
   	Balance, beginning of year	$1,238,000
   	Net income	451,000		$1,689,000
   	Preferred dividends	$46,440
   	Common dividends	94,560		141,000
   	Balance, end of year					1,548,000
   Total stockholders' equity						$3,870,000
   Sales						$23,053,500
   Interest expense						$58,020

   Assuming that total assets were $4,779,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

   a. Ratio of fixed assets to long-term liabilities
   b. Ratio of liabilities to stockholders' equity
   c. Asset turnover
   d. Return on total assets	%
   e. Return on stockholders’ equity	%
   f. Return on common stockholders' equity	%

Answer 1

a.	Ratio of fixed assets to long term liabilties = Fixed assets / Long term liabilities = 2127400 / 967000	2.2
b.	Ratio of liabilities to stockholders' equity = Liabilities / Stockholders' equity = 1161000 / 3870000	0.3

c.	Ending total assets = Ending total liabilities + Ending stockholders' equity = 1161000 + 3870000	5031000
	Average total assets = ( Beginning total assets + Ending total assets ) / 2 = ( 4779000 + 5031000 ) / 2	4905000
	Asset turnover = Sales / Average total assets = 23053500 / 4905000	4.7

d.

Return on total assets = Net income / Average Total assets = 451000 / 4905000

9.2%

e.	Beginning stockholders' equity = Preferred stock + Common stock + Beginning retained earnings = 1161000 + 1161000 + 1238000	3560000
	Average stockholders' equity = ( Beginning stockholders' equity + Ending stockholders' equity ) / = ( 3560000 + 3870000 ) / 2	3715000
	Return on stockholders' equity = Net income / Average Stockholders' equity = 451000 / 3715000	12.1%

f.		Beginning	Ending
	Stockholders' equity	3560000	3870000
	(-) Preferred stock	1161000	1161000
	Common stockholders' equity	2399000	2709000

Average common stockholders' equity = ( Beginning common stockholders' equity + Ending common stockholders' equity ) / 2 = ( 2399000 + 2709000 ) / 2	2554000
Return on common stockholders' equity = ( Net income - Preferred dividends ) / Average common stockholders' equity = ( 451000 - 46440 ) / 2554000	15.8%