Question

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		$268,000		$241,000		$214,000
Notes payable (8% interest)		90,000		90,000		90,000
Common stock		36,000		36,000		36,000
Preferred 3% stock, $100 par		18,000		18,000		18,000
	(no change during year)
Retained earnings		100,665		69,485		54,000

The 20Y7 net income was $31,720, and the 20Y6 net income was $16,025. 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 rate earned on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. When required, round to one decimal place.

	20Y7		20Y6
Return on total assets		%		%
Return on stockholders’ equity		%		%
Return on common stockholders’ equity		%		%

Answer 1

Return on total assets = (net income+interest)/average total assets

20Y7

Average total assets = (268000+241000)/2 = 254500

return on total assets = (31720+90000*0.08)/254500

return on total assest = 15.3%

20Y6

Average total assets = (241000+214000)/2 = 227500

return on total assets = (16025+90000*0.08)/227500

return on total assets = 10.2%

return on stockholder's equity = net income/average total stockholder equity

20Y7

average total stockholder equity = (36000+18000+100665+36000+18000+69485)/2

average total stockholder equity = 139075

return on stockholder's equity = 31720/139075 = 22.8%

20Y6

average total stockholder equity = (36000+18000+69485+36000+18000+54000)/2

average total stockholder equity = 115742.5

return on stockholder equity = 16025/115742.5 = 13.8%

Return on common stockholders equity = (net income-prefferred dividend)/average total common stockholder equity

average total common stockholder equity = (36000+100665+36000+69485)/2

average total common stockholder equity = 121075

return on common stockholder equity = (31720-18000*0.03)/121075

return on common stockholder equity = 25.8%

20Y6

Average total common stockholder equity = (36000+69485+36000+54000)/2 = 97742.5

return on common stockholder equity = (16025-18000*0.03)/97742.5

return on common stockholder equity = 15.8%