Question

Question: Six Measures of Solvency or Profitability

Could you please show out the calculations. Thanks

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

Property, plant, and equipment (net)						$2,058,000
Liabilities:
	Current liabilities			$207,000
	Note payable, 6%, due in 15 years			1,029,000
	Total liabilities					$1,236,000
Stockholders' equity:
	Preferred $2 stock, $100 par (no change during year)					$1,854,000
	Common stock, $10 par (no change during year)					1,854,000
Retained earnings:
	Balance, beginning of year	$1,978,000
	Net income	665,000		$2,643,000
	Preferred dividends	$37,080
	Common dividends	133,920		171,000
	Balance, end of year					2,472,000
Total stockholders' equity						$6,180,000
Sales						$47,721,300
Interest expense						$61,740

Assuming that total assets were $7,045,000 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=Property, plant, and equipment (net)/Note payable, 6%, due in 15 years

=2058000/1029000

=2:1

b. Ratio of liabilities to stockholders' equity=Total liabilities/Total stockholders' equity

=1236000/6180000

=0.2:1

c. Asset turnover=Sales/Total Assets

=47721300/7045000

=6.77 times that is 6.7:1.

d. Return on total assets=Earnings before interest and tax/Total Net Assets

=(Net income+Interest expense)/(Total Assets-Total liabilities)

=(665000+61740)/(7045000-1236000)

=726740/5809000

=0.1251 that is 12.5%

e. Return on stockholders’ equity=Net income/Total stockholders' equity

=665000/6180000

=0.1076 that is 10.8%

f. Return on common stockholders' equity=(Net income/preferred dividend)/Common stockholders equity

=(665000-37080)/(Total stockholders' equity-preferred stock)

=627920/(6180000-1854000)

=627920/4326000

=0.1451 that is 14.5%