The balance sheets at the end of each of the first two years of operations indic

Question

The balance sheets at the end of each of the first two years of operations indicate the following: ? Year 2 Year 1 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 65,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, $100 par 100,000 100,000 Common stock, $10 par 600,000 600,000 Paid-in capital in excess of par—Common stock 75,000 75,000 Retained earnings 310,000 210,000 ? ? If net income is $150,000 and interest expense is $20,000 for Year 2, what is the rate earned on stockholders' equity for Year 2? a. 14.5% b. 6.9% c. 13.8% d. 16.04%

Explanation / Answer

Calculate rate earned on stockholder's equity :

Average  stockholder' sequity = 985000+1085000/2 = 1035000

Rate earned stockholder's equity= 170000*100/1035000 = 16.4%

So answer is d) 16.4%

Year 2 Year 1 Common Stock 600000 600000 Paid in capital in excess of par-Common 75000 75000 Retained earnings 310000 210000 Preferred stock 100000 100000 Total Stockholder' sequity 1085000 985000

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