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)						$1,027,200
Liabilities:
	Current liabilities			$129,000
	Note payable, 6%, due in 15 years			642,000
	Total liabilities					$771,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$462,600
	Common stock, $10 par (no change during year)					462,600
Retained earnings:
	Balance, beginning of year	$494,000
	Net income	229,000		$723,000
	Preferred dividends	$18,504
	Common dividends	87,696		106,200
	Balance, end of year					616,800
Total stockholders' equity						$1,542,000
Sales						$15,108,500
Interest expense						$38,520

Assuming that total assets were $2,197,000 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	1,027,200
Long Term Liabilities	642,000
Fixed Assets to Long-Term Liabilities (1,027,200 / 642,000)	1.6

(b)

Ratio of Liabilities to Stockholders' Equity = Total Liability / Stockholders Equity
Total Liabilities	771,000
Stockholders Equity	1,542,000
Liabilities to Stockholders' Equity (771,000 / 1,542,000)	0.5

(c)

Asset Turnover = Net Sales / Average Total Assets
Net Sales	15,108,500
Average Total Assets	2,255,000
Asset Turnover	6.7
Ending total assets = Ending total liabilities + Ending stockholders' equity
Ending total liabilities	771,000
Ending Stockholders' Equity	1,542,000
Ending Total Assets (771,000 + 1,542,000)	2,313,000
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Beginning Total Assets	2,197,000
Ending Total Assets	2,313,000
Average Total Assets [(2,197,000 + 2,313,000) / 2]	2,255,000

(d)

Return on Total Assets = Net Income / Average Total Assets
Net Income	229,000
Average Total Assets	2,255,000
Return on Total Assets	10.2%

(e)

Return on Stockholders’ Equity = Net Income / Average Stockholders Equity
Net Income	229,000
Average Stockholders Equity	1,480,600
Return on Stockholders’ Equity	15.5%
Beginning stockholders' equity = Preferred stock + Common stock + Beginning retained earnings
Preferred stock	462,600
Common stock	462,600
Beginning retained earnings	494,000
Beginning stockholders' equity	1,419,200
Average stockholders' equity = ( Beginning stockholders' equity + Ending stockholders' equity ) / 2
Beginning stockholders' equity	1,419,200
Ending stockholders' equity	1,542,000
Average stockholders' equity [(1,419,200 + 1,542,000) / 2]	1,480,600

(f)

Return on Common Stockholders' Equity = (Net Income - Preference Dividend) / Average Common Stockholders' Equity
Net Income	229,000
Preference Dividend	18,504
Average Common Stockholders' Equity	1,018,000
Return on Common Stockholders' Equity	20.68%
	Beginning	Ending
Stockholders' equity	1,419,200	1,542,000
Less: Preferred stock	462,600	462,600
Common Stockholders' Equity	956,600	1,079,400
Average common stockholders' equity = ( Beginning common stockholders' equity + Ending common stockholders' equity ) / 2
Beginning common stockholders' equity	956,600
Ending common stockholders' equity	1,079,400
Average common stockholders' equity [(956,600 + 1,079,400) /2]	1,018,000