Question

The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

Property, plant, and equipment (net)						$2,444,400
Liabilities:
	Current liabilities			$234,000
	Note payable, 6%, due in 15 years			1,164,000
	Total liabilities					$1,398,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$2,097,000
	Common stock, $10 par (no change during year)					2,097,000
Retained earnings:
	Balance, beginning of year	$2,236,000
	Net income	661,000		$2,897,000
	Preferred dividends	$83,880
	Common dividends	17,120		101,000
	Balance, end of year					2,796,000
Total stockholders' equity						$6,990,000
Sales						$34,349,700
Interest expense						$69,840

Assuming that total assets were $7,969,000 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 (net)	/	Long-Term Liabilities
		2,444,400	/	1,164,000
		2.10
b.	Ratio of liabilities to stockholders' equity =	Total Liabilities	/	Total Stockholders’ Equity
		1,398,000	/	6,990,000
		0.20
c.	Asset turnover =	Net Sales	/	Average Total Assets*
		34,349,700	/	8,178,500
		4.20
* [($7,969,000 + $8,388,000) ÷ 2] . The end-of-period total assets are equal to the sum of total liabilities ($1,398,000) and stockholders’ equity ($6,990,000).
d.	Return on total assets =	Net Income + Interest Expense	/	Average Total Assets*
		661,000+69,840	/	8,178,500
		730,840	/	8,178,500
		8.94%
e.	Return on stockholders’ equity =	Net Income	/	Average Total Stockholders’ Equity
		661,000	/	6,710,000
		9.85%
* [($2,236,000 + $2,097,000 + $2,097,000) + $6,990,000] ÷ 2
f.	Return on common stockholders' equity =	Net Income – Preferred Dividends	/	Average Common Stockholders’ Equity
		661,000 - 83,880	/	4,613,000
		577,120	/	4,613,000
		12.51%