Profitability Ratios The following selected data were taken from the financial s
ID: 2536575 • Letter: P
Question
Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20YS December 31 20Y7 20Y6 20YS Total assets Notes payable (8% interest) Common stock Preferred 3% stock, $100 par $252,000 80,000 32,000 16,000 S227,000 80,000 32,000 16,000 $202,000 80,000 32,000 16,000 (no change during year) Retained earnings The 20Y7 net income was $30,320, and the 20Y6 net income was $17,740. No dividends on common stock were declared between 20YS and 20Y7. Preferred dividends were dedared and paid in full in 20Y6 and 95,100 65,260 48,000 20Y7 a. Determine the return on total assets, the rate earned on stockholders' equity, and the return on common stockholders' equity for the years 20Y6 and 20Y7. When required, round to one decimal place. 20Y7 20Y6 Return on total assets Return on stockholders' equity Return on common stockholders' equity b. The profitability ratios indicate that Vidahill Inc.'s profitability has improved .Since the rate of return on assets is less thanthe return on stockholders equity in both years, there must be positive leverage from the use of debt.Explanation / Answer
Solution (a)
Return on total assets= Earnings before interest and tax* / Total net assets X 100
* Earnings before interest and tax = Net Income + Interest expenses
20Y7
20Y6
Return on total assets
= ($ 30,320 + $ 6,400) / $ 252,000 X 100
= ($ 17,740 + $ 6,400) / $ 227,000 X 100
=14.6 %
=10.6 %
Interest expense= Calculated on Notes Payable $ 80,000 (@ 8%)
= $ 80,000 X 8 % =$ 6,400
Return on stockholders’ Equity = Net Income /Shareholder's Equity X 100
*Stockholders’ equity = Common stock + Preferred stock + Retained earning
This Year
Last Year
Return on stockholders’ Equity
= $ 30,320 / ( $ 32,000 + $ 16,000+ $ 95,100) x 100
=$ 17,740/ ($ 32,000 + $ 16,000+ $ 65,260) x 100
=21.4 %
=15.7 %
Return on common stockholders’ Equity = Net Income – Preference dividend /Average common stock Shareholder's Equity X 100
This Year
Last Year
Return on common stockholders’ Equity
=( $ 30,320 - $ 480) / $ 32,000 X 100
=($ 17,740- $ 480) / $ 32,000 X 100
= 93.3%
= 53.9 %
20Y7
20Y6
Return on total assets
= ($ 30,320 + $ 6,400) / $ 252,000 X 100
= ($ 17,740 + $ 6,400) / $ 227,000 X 100
=14.6 %
=10.6 %
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