Question
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Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for...
Profitability Ratios
The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:
| December 31 | |||||||
| 20Y7 | 20Y6 | 20Y5 | |||||
| Total assets | $172,000 | $155,000 | $138,000 | ||||
| Notes payable (8% interest) | 60,000 | 60,000 | 60,000 | ||||
| Common stock | 24,000 | 24,000 | 24,000 | ||||
| Preferred 7% stock, $100 par | 12,000 | 12,000 | 12,000 | ||||
| (no change during year) | |||||||
| Retained earnings | 73,725 | 51,135 | 36,000 | ||||
The 20Y7 net income was $23,430, and the 20Y6 net income was $15,975. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.
a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. Round percentages to one decimal place.
| 20Y7 | 20Y6 | |||
| Return on total assets | % | % | ||
| Return on stockholders’ equity | % | % | ||
| Return on common stockholders’ equity | % | % | ||
b. The profitability ratios indicate that the company's profitability has . Since the rate of return on total assets is the return on stockholders' equity in both years, there must be leverage from the use of debt.
Solutions
Expert Solution
| 20y7 | 20y6 | |
| Return on total assets = EBIT/ Average Total Assets | ||
| EBIT = NI + Interest + Tax | ||
| Net Income | $23,430.00 | $15,975.00 |
| Average Assets | $1,63,500.00 | $1,46,500.00 |
| Interest = $60000 x 8% | $4,800.00 | $4,800.00 |
| ROTA = NI + interest/ Average Total Assets | 17.27% | 14.18% |
| Return on stockholders’ equity = Net Income/ Av. shareholder equity | ||
| Net Income | $23,430.00 | $15,975.00 |
| Shareholder Equity = Share Capital + Retained Earnings + preferred capital | $1,09,725.00 | $87,135.00 |
| Average Shareholder equity | $98,430.00 | $79,567.50 |
| Return on stockholders’ equity = Net Income/ Av. shareholder equity | 23.80% | 20.08% |
| Return on common stockholders’ equity = NI - Preferred Dividend/Av. common stock holders equity | ||
| Net Income | $23,430.00 | $15,975.00 |
| Preferred Dividend (12,000 x 7%) | $840.00 | $840.00 |
| Common stockholder equity = Common stock + Retained Earning | $97,725.00 | $75,135.00 |
| Av. Common stockholder equity | $86,430.00 | $67,567.50 |
| Return on common stockholders’ equity = NI - Preferred Dividend/Av. common stock holders equity | 26.14% | 22.40% |
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20Y5
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Notes payable (8% interest)
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Common stock
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18,000
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Notes payable (8% interest)70,000 70,000 70,000
Common stock28,000 28,000 28,000
Preferred 5% stock, $100 par14,000 14,000 14,000
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statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and
20Y5:
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20Y6
20Y5
Total assets
$254,000
$229,000
$204,000
Notes payable (8% interest)
80,000
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80,000
Common stock
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32,000
32,000
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16,000
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20Y5
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Notes payable (8% interest)
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Common stock
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28,000
28,000
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14,000
14,000
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55,150
42,000
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20Y5
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$214,000
Notes payable (8% interest)
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90,000
90,000
Common stock
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36,000
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