Question

11

Use this information for Kellman Company to answer the question that follow.

The balance sheets at the end of each of the first two years of operations indicate the following:

Kellman Company
	Year 2	Year 1
Total current assets	$610,100	$574,800
Total investments	60,000	40,500
Total property, plant, and equipment	898,900	693,700
Total current liabilities	107,400	84,900
Total long-term liabilities	283,500	228,500
Preferred 9% stock, $100 par	88,500	88,500
Common stock, $10 par	548,800	548,800
Paid-in capital in excess of par—Common stock	67,100	67,100
Retained earnings	473,700	291,200

Using the balance sheets for Kellman Company, if net income is $107,400 and interest expense is $43,600 for Year 2, what is the return on stockholders' equity for Year 2 (rounded to two decimal places)?

a. 9.88%

b. 10.07%

c. 10.37%

d. 9.71%

Answer 1

	Year 2	Year 1
Preferred 9% stock, $100 par	88500	88500
Common stock, $10 par	548800	548800
Paid-in capital in excess of par—Common stock	67100	67100
Retained earnings	473700	291200
Total stockholders' equity	1178100	995600
Average stockholders' equity = (1178100+995600)/2= $1086850
Return on stockholders' equity = Net income/ Average stockholders' equity = 107400/1086850= 9.88%
Option A is correct