Six Measures of Solvency or Profitability The following data were taken from the
ID: 2499088 • Letter: S
Question
Six Measures of Solvency or Profitability The following data were taken from the financial statements of Gates Inc. for the current fiscal year. Property, plant, and equipment (net) $3,200,000 Liabilities: Current liabilities $1,000,000 Mortgage note payable, 6%, issued 2005, due 2021 2,000,000 Total liabilities $3,000,000 Stockholders’ equity: Preferred $10 stock, $100 par (no change during year) $1,000,000 Common stock, $10 par (no change during year) 2,000,000 Retained earnings: Balance, beginning of year $1,570,000 Net income 930,000 $2,500,000 Preferred dividends $100,000 Common dividends 400,000 500,000 Balance, end of year 2,000,000 Total stockholders’ equity $5,000,000 Sales $18,900,000 Interest expense $120,000 Assuming that long-term investments totaled $3,000,000 throughout the year and that total assets were $7,000,000 at the beginning of the current fiscal year, determine the following. Round to one decimal place.
A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.
__________
a. Ratio of fixed assets to long-term liabilities ________ b. Ratio of liabilities to stockholders' equity _______ c. Ratio of sales to assets _______ d. Rate earned on total assets _______A measure of profitability of assets, without regard to the portion of assets financed by creditors or stockholders.
__________
% e. Rate earned on stockholders' equity _______ % f. Rate earned on common stockholders' equity ______Explanation / Answer
a. fixed assets to long-term liabilities = (7000000 - 3000000) / 2000000
= 2:1
b.
liabilities to stockholders' equity = 3000000 / 5000000
= 0.6: 1
c. sales to assets = 18900000 / 7000000
= 2.7 : 1
d. Rate earned on total assets = 930000 / 7000000 x 100
= 12.4%
e. Rate earned on stockholders' equity = 930000 / 5000000 x 100
= 18.60%
f. Rate earned on common stockholders' equity = (930000 - 100000) / 5000000 x 100
= 16.60%