Six Measures of Solvency or Profitability The following data were taken from the
ID: 2530280 • 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 Note payable, 6%, due in 15 years 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 $18,750,000 Interest expense $120,000 Assuming that total assets were $7,000,000 at the beginning of the current fiscal year, determine the following. 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 %
Explanation / Answer
SOLUTION
(A) Ratio of fixed assets to long-term liabilities = Fixed assets / Long term liabilities
= $3,200,000 / $2,000,000
= 1.6
(B) Ratio of liabilities to stockholders' equity = Total liabilities / Total stockholder's equity
= $3,000,000 / $5,000,000
= 0.6
(C) Asset turnover = Net sales / Average total assets
= $18,750,000 / [($7,000,000 + 8,000,000) / 2]
= $18,750,000 / 7,500,000
= 2.5
(D) Return on total assets = (Net income + interest expense) / Average total assets
= ($930,000 + $120,000) / [($7,000,000 + 8,000,000) / 2]
= $1,050,000 / 7,500,000
= 14%
(E) Return on stockholders’ equity = Net income / Average stockholder's equity
= $930,000 / 4,785,000 = 19,44%
Average stockholder's equity = ($1,000,000 + $2,000,000 + $1,570,000 + $5,000,000) / 2
= $4,785,000