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gnmentsessionLocator-assignment-take&inprogress; fs eAssignment/takeAssignmentMain.do?invoker assignments&takeAssi; eBook Show Me How Caiculator Profitability Ratios The following selected data were taken from the finandal statements of vidahllInc. for December 31, 20Y7, 20Y6, and 20Ys: December 31 20Y7 20Y6 20YS $3,200,000 $5,0,00 $4800,000 $4,800,000 2,500,000 250,000 2,500,000 2,500,000 Notes payable (6% interest) Common stock Preferred 2.5% stock, $ 100 par 250,000 250,000 (no change during year) Retained earnings The 20Y7 net income was $411,000, and the 20Y6 net income was $462,500. No dividends on common stock were declared between 20Y5 and 20Y7 Preferred dividends were declared and paid in full in 20Y6 and 2017. a. Determine the return on total assets, the return on stockholders\' equity, and the return on common stockholders\' equity for the years 20Y6 and 20Y Round percentages to one decimal place. 500,000 500,000 750,000 500,000 1,574,000 1,222,000 Return on total assets Return on stockholders equity Return on common stockholders\' equity 20Y7 0.061 x % 0.141 x % 0.141 x % 20Y6 0.051 x % 0.141 x % 0.141 X 96 b. The profitability ratios indicate that the company\'s profita ability has deteriorated Because the return on common stockholders\' equity exceed

Solution

a) Calculation of Returns for the year 20Y7

Total Assets = $5,200,000

Net Income = $411,000

Interest on Notes payable = 6%*$2,500,000 = $150,000

Earning before interest and taxes (EBIT) = Net income+Interest on notes payable = $411,000+$150,000 = $561,000

Return on Total Assets = (EBIT/Total Assets)*100 = ($561,000/$5,200,000)*100 = 10.79%

Stockholder\'s Equity = Common Stock+Preferred Stock+Retained Earnings

= $250,000+$500,000+$1,574,000 = $2,324,000

Return on Stockholders Equity = (Net income/Stockholder\'s Equity)*100 = ($411,000/$2,324,000)*100 = 17.69%

Common Stockholders Equity = Common Stock+Retained Earnings = $250,000+$1,574,000 = $1,824,000

Preferred Dividends = $500,000*2.5% = $12,500

Earning available for common stockholders = Net income-Preferred dividends = $411,000-$12,500 = $398,500

Return on common stockholder\'s equity = (Earning for common stock/Common stockholder\'s equity)*100

= ($398,500/$1,824,000)*100 = 21.85%

Calculation of Returns for the year 20Y6

Total Assets = $5,000,000

Net Income = $462,500

Interest on Notes payable = 6%*$2,500,000 = $150,000

Earning before interest and taxes (EBIT) = Net income+Interest on notes payable = $462,500+$150,000 = $612,500

Return on Total Assets = (EBIT/Total Assets)*100 = ($612,500/$5,000,000)*100 = 12.25%

Stockholder\'s Equity = Common Stock+Preferred Stock+Retained Earnings

= $250,000+$500,000+$1,222,000 = $1,972,000

Return on Stockholders Equity = (Net income/Stockholder\'s Equity)*100 = ($462,500/$1,972,000)*100 = 23.45%

Common Stockholders Equity = Common Stock+Retained Earnings = $250,000+$1222,000 = $1,472,000

Preferred Dividends = $500,000*2.5% = $12,500

Earning available for common stockholders = Net income-Preferred dividends = $462,500-$12,500 = $450,000

Return on common stockholder\'s equity = (Earning for common stock/Common stockholder\'s equity)*100

= ($450,000/$1,472,000)*100 = 30.57%