Question

Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

December 31

20Y720Y620Y5

Total assets$221,000 $199,000 $177,000

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

(no change during year)      

Retained earnings70,600 53,100 42,000

The 20Y7 net income was $18,200, and the 20Y6 net income was $11,800. 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. When required, round to one decimal place.

20Y720Y6

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 return on assets is   the return on stockholders' equity in both years, there must be   leverage from the use of debt.

Answer 1

Requirement A:

Ratios	Formula	2017	2016
Return on Total Assets	Net income/Average Total assets	8.67%	6.28%
Return on Stockholders Equity	Net income/Average Stockholders Equity	17.53%	13.18%
Return on Common Stockholders Equity	Net income available to common stock holder's/Average Common Stockholders Equity	62.50%	39.64%

Requirement B:

The profitability ratios indicate that the company's profitability has Increased . Since the return on assets is less than the return on stockholders' equity in both years, there must be Financial leverage from the use of debt.