Exercise 139 Financial Ratios for Assessing Profitability an

Exercise 13-9 Financial Ratios for Assessing Profitability and Managing Debt [LO13-4, LO13-5]

The financial statements for Castile Products, Inc., are given below:

     Account balances at the beginning of the year were: accounts receivable, $230,000; and inventory, $270,000. All sales were on account. Assets at the beginning of the year totaled $1,070,000, and the stockholders’ equity totaled $625,000.

Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Solution

Part 3

Return on total assets = net income + (interest *(1-t)) / Average total assets = (239470+(27900*(1-30%))) / ((1070000+1431000)/2) = (239470+19530) / 1250500 = 259000 / 1250500 = 20.7%

Part 4

Return on equity = (net income - preferred dividends) / Average common stockholders\' equity = (239470-0)/((861000+625000)/2) = 239470 / 743000 = 32.2%