Kris Building Supply sells various building materials to retail outlets. The com
ID: 2493712 • Letter: K
Question
Kris Building Supply sells various building materials to retail outlets. The company has just approached Kingston State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:
During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.
Assume that you have just inherited several hundred shares of Kris Building Supply stock. Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited.
You decide first to assess the well-being of the common stockholders. For both this year and last year, compute the following:
You decide next to assess the company’s rate of return. Compute the following for both this year and last year:
The return on total assets. (Total assets at the beginning of last year were $2,220,000.) (Do not round intermediate calculations. Round your final answers to 1 decimal place.)
Return on Total Assets? this year_________% last year___________%
The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,269,000.) (Do not round intermediate calculations. Round your final answers to 1 decimal place.)
Return on common stockholders' Equity? this year___________% last Year______________%
Kris Building Supply sells various building materials to retail outlets. The company has just approached Kingston State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:
Explanation / Answer
NOTE:- REQUIREMENTS OF QUESTION 1 IS NOT GIVEN, SO CAN NOT BE SOLVED ONLY REQUIREMNNTS OF QUESTION 2 IS GIVEN SO SOLVING PARTS OF QUESTION 2.
ANSWER 2 (a)
345100
ANSWER 2 (b)
Decesion ;- Finacial leverge is positive in both years becuse the return on equity is greate rthan retun on assets .It is beacuse of three factors 1, prefeered stock having only 7% dividend, than bons having int after tax only 6.3% and accounts payabel which bear no interest cost.
PARTICULARS THIS YEAR ($) LAST YEAR ($) NET INCOME 306040 222040 ADD: INT. AFTER TAX(55800 -30%) 39060 39060 TOTAL (a)345100
261100 AVERAGE TOTAL ASSETS (b) 2835982 2384778 RETURN ON TOTAL ASSETS [(a) / (b)]*100 12.2% 10.9%Related Questions
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