Question

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)						$1,268,400
Liabilities:
	Current liabilities			$180,000
	Note payable, 6%, due in 15 years			906,000
	Total liabilities					$1,086,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$1,086,000
	Common stock, $10 par (no change during year)					1,086,000
Retained earnings:
	Balance, beginning of year	$1,158,000
	Net income	474,000		$1,632,000
	Preferred dividends	$21,720
	Common dividends	162,280		184,000
	Balance, end of year					1,448,000
Total stockholders' equity						$3,620,000
Sales						$28,448,700
Interest expense						$54,360

Assuming that total assets were $4,471,000 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 liabilities = Fixed assets / Long term liabilities

Fixed assets = Property, plant & equipment = $1268400

Long term liabilities = Notes payable = $906000

Ratio of fixed assets to long term liabilities = $1268400 / $906000 = 1.4

(b) Ratio of liabilities to stockholder's equity =Total Liabilities / Stockholder's equity

Total Liabilities = $1086000 , Stockholder's equity = $3620000

Ratio of liabilities to stockholder's equity = $1086000 / $3620000 = 0.3

(c) Asset turnover ratio = Sales / Average assets

where, Average assets = Beginning assets / Ending assets / 2

Beginning assets = $4471000

Ending assets = Total stockholder's equity + Total liabilities = $3620000 + $1086000 = $4706000

Average assets = ($4471000 + $4706000) / 2 = $9177000 / 2 = $4588500

Asset turnover ratio = Sales / Average assets

Asset turnover ratio = $28448700 / $4588500 = 6.2

(d) Return on total assets = Net income / Total assets * 100

Net income = $474000, Total assets (ending assets, as calculated in point (c) above) = $4706000

Return on total assets = $474000 / $4706000 * 100 = 10.07%

(e) Return on stockholder's equity = Net income / Stockholder's equity * 100

Net income = $474000, Stockholder's equity = $3620000

Return on stockholder's equity = $474000 / $3620000 * 100 = 13.09%

(e) Return on common stockholder's equity = Net income / Common Stockholder's equity * 100

Net income = $474000

Common Stockholder's equity = Total stockholder's equity - Preferred stockholder's equity

Common stockholder's equity = $3620000 - $1086000 = $2534000

Return on common stockholder's equity = $474000 / $2634000 * 100 = 18.70%