Question

Use this information for Kellman Company to answer the questions that follow.

The balance sheets at the end of each of the first two years of operations indicate the following:

Kellman Company Year 2 Year 1

Total current assets $600,000 $560,000

Total investments 60,000 40,000

Total property, plant, and equipment 900,000 700,000

Total current liabilities 125,000 65,000

Total long-term liabilities 350,000 250,000

Preferred 9% stock, $100 par 100,000 100,000

Common stock, $10 par 600,000 600,000

Paid-in capital in excess of par—Common stock 75,000 75,000

Retained earnings 310,000 210,000

Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year?

a. 10.4% b. 11.9% c. 10.5% d. 8.4%

2. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2?

a. 6.9% b. 14.5% c. 16.04% d. 13.8%

3. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2? a. $4.16 b. $4.32 c. $4.02 d. $2.49

4. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation to two decimal places and final answers to one decimal place.)

	a.	7.5
	b.	13.4
	c.	12.1
	d.	8.5

Answer 1

Concepts and reason

Balance sheet: Balance sheet refers to a statement of assets, liabilities, and owner’s equity as on a particular date of the fiscal year of the business enterprise. It also depicts the financial status of a business enterprise in a nutshell.

Capital asset: It is an asset that has expected useful life of more than one year and is not easily convertible into cash.

Assets: Assets are anything that is tangible or intangible and is owned and controlled to produce value and is used by a company to produce positive economic values. The asset is generally classified into fixed assets, current assets, tangible assets, and intangible assets.

Capital budgeting: It is a process that evaluates large potential expenses and investments. It is a process to evaluate large investment proposals.

Liabilities: Any obligation that has to be fulfilled by a company in the future and the obligations that are being used as resources for the operations or facilitation of operations are liabilities.

Shareholder’s equity: The conclusive amount after paying all the obligations both from the available assets current and non-current is shareholder’s equity.

Fundamentals

Return on investment (ROI) is the amount of total profit earned by a division with its assets. The return on investment is used to check the efficiency of the unit. It shows the efficiency of the unit to utilize its asset to generate the profit.

Return on total assets: Return on assets states that how profitable a company is related to its total asset.

Earnings per share (EPS): The part of profit that is allocated to each outstanding share of a company is called basic earnings per share.

Price-Earnings ratio (PE ratio): The ratio that shows the relationship between the market price of a share and the earning of a company.

(1)

Calculate the return on the total assets:

Thus, the return on the total assets is 11.90%.

Workings:

Calculate the net profit:

Calculate the average assets:

Calculate the total assets:

(2)

Calculate the return on stockholders’ equity:

Thus, the return on stockholders’ equity is 14.5%.

Workings:

Calculate the average stockholders’ equity:

Workings:

Calculate the stockholders’ equity:

(3)

Calculate the earnings per share for Year 2:

Thus, the earnings per share for Year 2 is $4.02.

Workings:

Calculate the preferred dividend:

Calculate the number of equity shares:

(4)

Calculate the price–earnings ratio for Year 2:

Workings:

Calculate the earnings per shares:

Calculate the preferred dividend:

Calculate the number of equity shares:

Ans: Part 1

The return on the total assets is 11.9% for Company K when the net income is $150,000, and the interest expense is $20,000.

Part 2

The return on stockholders’ equity is 14.5% in Year 2 for Company K when the net income is $150,000, and the interest expense is $20,000.

Part 3

The earning per share is $4.02 in Year 2 for Company K when the net income is $250,000 and the interest expense is $30,000.

Part 4

The price–earnings per share is $7.5 in Year 2 for Company K when the net income is $250,000 and the interest expense is $20,000.