Question

Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

December 31

20Y720Y620Y5

Total assets$221,000 $199,000 $177,000

Notes payable (8% interest)70,000 70,000 70,000

Common stock28,000 28,000 28,000

Preferred 5% stock, $100 par14,000 14,000 14,000

(no change during year)      

Retained earnings70,600 53,100 42,000

The 20Y7 net income was $18,200, and the 20Y6 net income was $11,800. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.

a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. When required, round to one decimal place.

20Y720Y6

Return on total assets%%

Return on stockholders’ equity%%

Return on common stockholders’ equity%%

b. The profitability ratios indicate that the company's profitability has improved . Since the return on assets is less than  the return on stockholders' equity in both years, there must be positive  leverage from the use of debt.

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a. Divide the sum of net income plus interest expense by average total assets. Average total assets = (Beginning total assets + Ending total assets) ÷ 2.

Divide net income by average total stockholders'equity. Average total stockholders'equity = (Beginning total stockholders'equity + Ending total stockholders'equity) ÷ 2.

Divide net income minus preferred dividends by average common stockholders'equity. Common stockholders'equity = Common stock + Retained earnings. Average common stockholders'equity = (Beginning common stockholders'equity + Ending common stockholders'equity) ÷ 2.

b. Consider what the ratios tell you about the company's performance.

Answer 1

	A		20Y7	20Y6	20Y5
		Total Assets	221,000	199,000	177,000
		Note Payable(8 % interest)	70,000	70,000	70,000
		Common Stock	28,000	28,000	28,000
		Preferred 5 % Stock	14,000	14,000	14,000
		Retained Earnings	70,600	53,100	42,000
		Stock Holder equity	112,600	95,100	84,000
		Common stock holder Equity	98,600	81,100	70,000
		Return on Total Asset
			20Y7	20Y6
		Net Income	18,200	11,800
		Add: Interest	5,600	5,600
			23,800	17,400
		Average Total Assets	210,000	188,000
		Return on Total Asset	11%	9%
		Return on Stockholder equity
			20Y7	20Y6
		Net Income	18,200	11,800
		Average Total stock holder Equity	103,850	89,550
		Return on Stockholder equity	18%	13%
		Return on Common Stock Holder equity
			20Y7	20Y6
		Net Income	18,200	11,800
		Preference Dividend	700	700
		Net Income-Preference Dividend	17,500	11,100
		Average Common stock holder Equity	89,850	75,550					ekkarill92 Next > < Previous Related Solutions Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for... Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5: December 31 20Y7 20Y6 20Y5 Total assets $320,000 $288,000 $256,000 Notes payable (8% interest) 110,000 110,000 110,000 Common stock 44,000 44,000 44,000 Preferred 6% stock, $100 par 22,000 22,000 22,000 (no change during year) Retained earnings 117,200 80,880 66,000 The 20Y7 net income was $37,640, and the 20Y6 net income was $16,200. No dividends on common stock were... Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for... 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