Question

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

Property, plant, and equipment (net)						$1,752,600
Liabilities:
	Current liabilities			$153,000
	Note payable, 6%, due in 15 years			762,000
	Total liabilities					$915,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$549,000
	Common stock, $10 par (no change during year)					549,000
Retained earnings:
	Balance, beginning of year	$586,000
	Net income	298,000		$884,000
	Preferred dividends	$21,960
	Common dividends	130,040		152,000
	Balance, end of year					732,000
Total stockholders' equity						$1,830,000
Sales						$16,059,000
Interest expense						$45,720

Assuming that total assets were $2,608,000 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

= Property, Plant and Equipment/Note payable

= $1,752,600/$762,000 = 2.30

b)  Ratio of liabilities to stockholders' equity = Total liabilities/Stockholder's Equity

= $915,000/$1,830,000 = 0.50

c) Asset turnover = Net sales/Average Total Assets

Closing Total Assets = Stockholder's Equity+Total Liabilities

= $1,830,000+$915,000 = $2,745,000

Average total assets = (Opening Assets+Closing Assets)/2

= ($2,608,000+$2,745,000)/2 = $2,676,500

Asset Turnover = $16,059,000/$2,676,500 = 6 times

d) Return on Total Assets = Earning before Interest and tax/Average Total Assets

Earning before Interest and tax = Net Income+Interest

= $298,000+$45,720 = $343,720

Return on total Assets = $343,720/$2,676,500 = 12.84%

e) Return on stockholders’ equity = Net Income/Stockholder's Equity

= $298,000/$1,830,000 = 16.28%

f) Return on common stockholders' equity = Earning for common stockholders/Common stockholders'

= (298,000-$21,960)/$1,208,000 = 22.85%