Question

Measures of liquidity, Solvency, and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 62 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$ 3,614,400		$ 3,055,100
Net income			817,600		625,700
Total			$4,432,000		$ 3,680,800
Dividends:
	On preferred stock		$ 10,500		$ 10,500
	On common stock		55,900		55,900
		Total dividends	$ 66,400		$ 66,400
Retained earnings, December 31			$ 4,365,600		$ 3,614,400

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$ 5,101,970		$ 4,700,720
Cost of goods sold	1,696,520		1,560,800
Gross profit	$ 3,405,450		$ 3,139,920
Selling expenses	$ 1,194,050		$ 1,450,030
Administrative expenses	1,017,160		851,600
Total operating expenses	$2,211,210		$2,301,630
Income from operations	$ 1,194,240		$ 838,290
Other revenue	62,860		53,510
	$ 1,257,100		$ 891,800
Other expense (interest)	328,000		180,800
Income before income tax	$ 929,100		$ 711,000
Income tax expense	111,500		85,300
Net income	$ 817,600		$ 625,700

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			20Y2		20Y1
Assets
Current assets
	Cash		$ 924,380		$ 797,480
	Marketable securities		1,399,060		1,321,530
	Accounts receivable (net)		905,200		854,100
	Inventories		686,200		525,600
	Prepaid expenses		174,888		159,500
		Total current assets	$ 4,089,728		$ 3,658,210
Long-term investments			1,933,912		467,256
Property, plant, and equipment (net)			5,330,000		4,797,000
Total assets			$ 11,353,640		$ 8,922,466
Liabilities
Current liabilities			$ 1,278,040		$ 1,438,066
Long-term liabilities:
	Mortgage note payable, 8%		$ 1,840,000		$ 0
	Bonds payable, 8%		2,260,000		2,260,000
		Total long-term liabilities	$ 4,100,000		$ 2,260,000
Total liabilities			$ 5,378,040		$ 3,698,066
Stockholders' Equity
Preferred $0.70 stock, $50 par			$ 750,000		$ 750,000
Common stock, $10 par			860,000		860,000
Retained earnings			4,365,600		3,614,400
Total stockholders' equity			$ 5,975,600		$ 5,224,400
Total liabilities and stockholders' equity			$ 11,353,640		$ 8,922,466

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity

Answer 1

For 20Y2

(A)

Times interest earned = Earning Before Interest and Taxes/interest expenses

= $1257100/$328000

= 3.8 times

(B)

Assets turnover = net sales/average total assets

Average total assets = ($8922466 + $11353640)/2 = $10138053

Therefore,

Asset turnover = $5101970/$10138053

= 0.5 times

(C)

Return on total assets = net income/average total assets

= $817600/$10138053

= 8.1%

(D)

Return on stockholders equity = net income/average stockholders equity

Average stockholders equity = ($5224400 + $5975600)/2 = $5600000

Therefore,

Return on stockholders equity = $817600/$5600000

= 14.6%

(E)

Return on common stockholders equity = net income available for common stockholders/average common stockholders equity

Net income available for common stockholders = net income - preferred dividends

= $817600 - $10500 = $807100

Common stockholders equity = shareholders equity - preferred stock

For 20Y2:

Common stockholders equity = $5975600 - $750000 = $5225600

For 20Y1:

Common stockholders equity = $5224400 - $750000 = $4474400

Therefore,

Average common stockholders equity = ($4474400 + $5225600)/2 = $4850000

Therefore,

Return on common stockholders equity = $807100/$4850000

= 16.6%