Question

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Stargel Inc. are as follows. The market price of Stargel Inc. common stock was $119.70 on December 31, 20Y2.

Stargel Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
			20Y2		20Y1
Retained earnings, January 1			$5,375,000		$4,545,000
Net income			900,000		925,000
Total			$6,275,000		$5,470,000
Dividends:
	On preferred stock		$45,000		$45,000
	On common stock		50,000		50,000
		Total dividends	$95,000		$95,000
Retained earnings, December 31			$6,180,000		$5,375,000

Stargel Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$10,000,000		$9,400,000
Cost of goods sold	5,350,000		4,950,000
Gross profit	$4,650,000		$4,450,000
Selling expenses	$2,000,000		$1,880,000
Administrative expenses	1,500,000		1,410,000
Total operating expenses	$3,500,000		$3,290,000
Income from operations	$1,150,000		$1,160,000
Other income	150,000		140,000
	$1,300,000		$1,300,000
Other expense (interest)	170,000		150,000
Income before income tax	$1,130,000		$1,150,000
Income tax expense	230,000		225,000
Net income	$900,000		$925,000

Stargel Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
			Dec. 31, 20Y2		Dec. 31, 20Y1
Assets
Current assets:
	Cash		$500,000		$400,000
	Marketable securities		1,010,000		1,000,000
	Accounts receivable (net)		740,000		510,000
	Inventories		1,190,000		950,000
	Prepaid expenses		250,000		229,000
		Total current assets	$3,690,000		$3,089,000
Long-term investments			2,350,000		2,300,000
Property, plant, and equipment (net)			3,740,000		3,366,000
Total assets			$9,780,000		$8,755,000
Liabilities
Current liabilities			$900,000		$880,000
Long-term liabilities:
	Mortgage note payable, 10%		$200,000		$0
	Bonds payable, 10%		1,500,000		1,500,000
		Total long-term liabilities	$1,700,000		$1,500,000
Total liabilities			$2,600,000		$2,380,000
Stockholders' Equity
Preferred $0.90 stock, $10 par			$500,000		$500,000
Common stock, $5 par			500,000		500,000
Retained earnings			6,180,000		5,375,000
	Total stockholders' equity		$7,180,000		$6,375,000
Total liabilities and stockholders' equity			$9,780,000		$8,755,000

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except dollar amounts which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

10. Times interest earned
11. Asset turnover
12. Return on total assets		%
13. Return on stockholders’ equity		%
14. Return on common stockholders’ equity		%

Answer 1

Times Interest Earned = Income before interest and taxes / Interest Expenses

Times Interest Earned = $1,300,000 / $170,000

Times Interest Earned = 7.6

Assets turnover ratio = Net sales / Average Assets

Assets turnover ratio = $10,000,000 / (($9,780,000 + $8,755,000) / 2)

Assets turnover ratio = 1.1

Return on total assets = Net income / Average total assets

Return on total assets = $1,300,000 / (($9,780,000 + $8,755,000) / 2)

Return on total assets = 14.0%

Return on stock holders equity = Net income / Average Stock holders equity

Return on stock holders equity = $1,300,000 / (($7,180,000 + $6,375,000) / 2)

Return on stock holders equity = 19.2%

Return on Common stock holders equity = (Net income - Preferred dividends) / Average Common Stock holders equity

Return on Common stock holders equity = ($1,300,000 - $45,000) / (($500,000 + $500,000)/2)

Return on Common stock holders equity = 251.0%

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