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)						$2,591,600
Liabilities:
	Current liabilities			$235,000
	Note payable, 6%, due in 15 years			1,178,000
	Total liabilities					$1,413,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$847,800
	Common stock, $10 par (no change during year)					847,800
Retained earnings:
	Balance, beginning of year	$904,000
	Net income	364,000		$1,268,000
	Preferred dividends	$33,912
	Common dividends	103,688		137,600
	Balance, end of year					1,130,400
Total stockholders' equity						$2,826,000
Sales						$24,384,700
Interest expense						$70,680

Assuming that total assets were $4,027,000 at the beginning of the current fiscal year, determine the following. When required, 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	%

Answer 1

a) Ratio of fixed assets to long-term liabilities = Fixed assets / Long term Liabilities
= $2,591,600/1,178,000 = 2.2

b) Ratio of liabilities to stockholders' equity = Total Liabilities / Total Stockholders Equity
= $1,413,000 / 2,826,000 = 0.5

c) Asset Turnover = Sales / Average Total Assets
= $24,384,700 / 3,309,300 = 7.4
Average Total Assets = ($2,591,600 +$4,027,000)/2 =$3,309,300

d) Return on total Assets = Net Income / Average Total Assets
= $364,000/3,309,300 = 11.0%

e) Return on stockholders’ equity = Net Income / Total Stockholders Equity
= $364,000 / 2,826,000 = 12.9%

f) Return on common stockholders' equity = Net Income for common stockholder / Total Common Stockholders Equity
= ($364,000 – 33,912) /(847,800 + 1,130,400)= 16.7%

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