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)						$1,404,800
Liabilities:
	Current liabilities			$175,000
	Note payable, 6%, due in 15 years			878,000
	Total liabilities					$1,053,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$789,750
	Common stock, $10 par (no change during year)					789,750
Retained earnings:
	Balance, beginning of year	$842,000
	Net income	333,000		$1,175,000
	Preferred dividends	$15,795
	Common dividends	106,205		122,000
	Balance, end of year					1,053,000
Total stockholders' equity						$2,632,500
Sales						$8,051,150
Interest expense						$52,680

Assuming that long-term investments totaled $1,843,000 throughout the year and that total assets were $3,501,000 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	1.6
b. Ratio of liabilities to stockholders' equity	0.4
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

Ratio of Fixed Assets to Long-Term Liabilities = Fixed assets / Long term liabilities

Ratio of Fixed Assets to Long-Term Liabilities = $1404800 / $878000

Ratio of Fixed Assets to Long-Term Liabilities = 1.60

b. Ratio of liabilities to stockholders' equity

Ratio of liabilities to stockholders' equity = Total Liabilities / Stock Holders' Equity

Ratio of liabilities to stockholders' equity = $1053000 / 2632500

Ratio of liabilities to stockholders' equity = 0.40

c. Asset turnover

Asset turnover = Net Sales / Average Assets

Asset turnover = $8051150 / (((1404800 + 1843000) + 3501000)/2 - $1843000)

Asset turnover = 5.26

d. Return on Total Assets = (Net Income + Interest) / Total Assets

Return on Total Assets = (333000 + 52680) / (1404800 + 1843000)

Return on Total Assets = 11.88%

e. Return on stockholders’ equity

Return on stockholders’ equity = Net Income / Average Stockholders' Equity

Return on stockholders’ equity = 333000 / (789750 + 789750 + 842000 + 2632500)/2

Return on stockholders’ equity = 333000 / 2527000

Return on stockholders’ equity = 13.18%

f. Return on common stockholders' equity

Return on common stockholders' equity = Net income - Preferred stock Dividend) / Average common stockholder's equity

Return on common stockholders' equity = 333000 - 15795 / (789750 + 789750 + 842000 + 1053000)/2

Return on common stockholders' equity = 317205 / 1737250

Return on common stockholders' equity = 18.26%