Six Measures of Solvency or Profitability The following data were taken from the

Question

Six Measures of Solvency or Profitability

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

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.

%

I only need e, and f answered, please.

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 $18,900,000 Interest expense $120,000

Explanation / Answer

e.rate earned on stock holder's equity = net income / average stock holder's equity

here,

net income = $930,000

average stock holder's equity = $4,785,000...(see note)

=>19.44%.

note:

Average stock holder's equity ={ [ opening preferred stock + opening common stock + opening retained earnings] + [ closing preferred stock + closing common stock + closing retained earnings] } / 2

here,

opening preferred and common stock equal to closing preferred and common stock.

=>{ {1,000,0000 + 2,000,000 + 1,570,000] + [ 1,000,000 + 2,000,000 + 2,000,000] } / 2

=>9,570,000/2

=>$4,785,000.

f.Rate earned on common stock

=> (net income - preferred stock dividend) / average common stockholder's equity

here,

net income = $930,000

preferred stock dividend = $100,000

average common stockholder's equity = {[opening common stock + opening retained earnings] + [closing common stock + closing retained earnings]} / 2

here,

opening common stock = closing stock = $2,000,000.

=> { [ $2,000,000+1,570,000] +[2,000,000+2,000,000]}/2

=>7,570,000/2

=>$3,785,000.

now,

rate earned on common stock holder's equity = ($930,000 - $100,000) / $3,785,000.

=>21.93%

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