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Six Measures of Solvency or Profitability The following data were taken from the financial statements of...

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) $1,407,600
Liabilities:
Current liabilities $157,000
Note payable, 6%, due in 15 years 782,000
Total liabilities $939,000
Stockholders' equity:
Preferred $2 stock, $100 par (no change during year) $939,000
Common stock, $10 par (no change during year) 939,000
Retained earnings:
Balance, beginning of year $1,002,000
Net income 381,000 $1,383,000
Preferred dividends $18,780
Common dividends 112,220 131,000
Balance, end of year 1,252,000
Total stockholders' equity $3,130,000
Sales $12,954,450
Interest expense $46,920

Assuming that long-term investments totaled $2,034,000 throughout the year and that total assets were $3,866,000 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 %

Solutions

Expert Solution

a. Ratio of fixed assets to long term liabilties = Fixed assets / Long term liabilities = 1407600 / 782000 1.8
b. Ratio of liabilities to stockholders' equity = Liabilities / Stockholders' equity = 939000 / 3130000 0.3
c. Ending total assets = Ending total liabilities + Ending stockholders' equity = 939000 + 3130000 4069000
Average total assets = ( Beginning total assets + Ending total assets ) / 2 = ( 3866000 + 4069000 ) / 2 3967500
Asset turnover = Sales / Average total assets = 12954450 / 3967500 3.3
d. Return on total assets = Net income / Average Total assets = 381000 / 3967500 9.6%
e. Beginning stockholders' equity = Preferred stock + Common stock + Beginning retained earnings = 939000 + 939000 + 1002000 2880000
Average stockholders' equity = ( Beginning stockholders' equity + Ending stockholders' equity ) / = ( 2880000 + 3130000 ) / 2 3005000
Return on stockholders' equity = Net income / Average Stockholders' equity = 381000 / 3005000 12.7%
f. Beginning Ending
Stockholders' equity 2880000 3130000
(-) Preferred stock 939000 939000
Common stockholders' equity 1941000 2191000
Average common stockholders' equity = ( Beginning common stockholders' equity + Ending common stockholders' equity ) / 2 = ( 1941000 + 2191000 ) / 2 2066000
Return on common stockholders' equity = ( Net income - Preferred dividends ) / Average common stockholders' equity = ( 381000 - 18780 ) / 2066000 17.5%

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