1) Witherspoon Corporation reports the following information on its financial st
ID: 2473675 • Letter: 1
Question
1) Witherspoon Corporation reports the following information on its financial statements for
the current year:
Net income $40,000
Interest expense 6,000
Income tax expense 12,500
Preferred dividends 3,600
Beg. End
Current assets $ 68,000 $ 81,000
Plant assets 340,000 365,000
Current liabilities 41,000 39,000
Long-term liabilities 100,000 90,000
Common stockholders equity 217,000 267,000
Preferred stockholders equity 50,000 50,000
a. Calculate return on assets.
b. Calculate return on equity.
c. Discuss how these measures might be used.
Explanation / Answer
Answer:
a)
Return on Assets = Net Income / Average Total Asset = $40,000 / $427,000 x 100 = 9.37%
Average Total Asset = (Beginning Total Assets + Ending Total Assets) / 2 = ($68000+$340000+$81000+$365000) / 2 = $854,000 / 2 = $427,000
Net Income (given) = $40,000
b)
Return on Equity = Net Income / Average Shareholder's Equity = $40,000 / $292,000 x 100 = 13.70%
Average Shareholder’s Equity = (Beginning + Ending) / 2 =
Average Shareholder’s Equity = (Beginning + Ending Common Stock Holders Equity) / 2 + (Beginning + Ending Preferred Stock holders equity) / 2
= ($217,000 + $267,000)/2 + ($50,000 + $50,000) / 2 = $292,000
c)
Return on Equity
ROE measures the profitability of equity funds Invested in the firm. This ratio reveals how profitability of the owner’s funds has been utilized by the firm. ROE is the important indicators of a firm’s profitability and potential growth.
Return on Asset
Net Income per rupee of average fixed assets. It measures profitability in term of Assets employed
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