Question

The following selected data were taken from the financial statements of the Winter Group for the three most recent years of operations:

	Dec. 31, Year 3	Dec. 31, Year 2	Dec. 31, Year 1
Total assets	$3,000,000	$2,700,000	$2,400,000
Notes payable (10% interest)	1,000,000	1,000,000	1,000,000
Common stock	400,000	400,000	400,000
Preferred $6 stock, $100 par	200,000	200,000	200,000
Retained earnings	1,126,000	896,000	600,000

The Year 3 net income was $242,000 and the Year 2 net income was $308,000. No dividends on common stock were declared during the 3 years.

Required:

a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for Years 2 and 3. If required, round your answers to one decimal place.

	Year 3	Year 2
Return on Total Assets	%	%
Return on Stockholders' Equity	%	%
Return on Common Stockholders' Equity	%	%

b. What conclusion can be drawn from these data as to the company’s profitability?

The profitability ratios indicate that The Winter Group’s profitability has  . Most of this change is from net income   in Year 3. There is   leverage from use of debt.

Answer 1

	Dec. 31, Year 3	Dec. 31, Year 2	Dec. 31, Year 1
Total assets	3000000	2700000	2400000
Notes payable (10% interest)	1000000	1000000	1000000
Common stock	400000	400000	400000
Preferred $6 stock, $100 par	200000	200000	200000
Retained earnings	1126000	896000	600000
Stockholders Equity	1726000	1496000	1200000
Common Stockholders Equity	1526000	1296000	1000000
	Year 3	Year 2
Net Income	242000	308000
Return on Total Assets = Net Income/Average Assets	8.49%	12.08%
Return on Stockholders' Equity = Net Income/Average Equity	15.02%	22.85%
Return on Common Stockholders' Equity	17.15%	26.83%
Profitability has decreased
change is due to decrease in net income
Positive leverage from use of debt