Profitability Metrics The following selected data were taken from the financial

Question

Profitability Metrics The following selected data were taken from the financial statements of The O'Malley Group Inc. for December 31, 20Y5, 20Y4, and 20Y3: 2OYS 20Y4 20Y3 Total assets Notes payable (10% interest) Common stock Preferred $4 stock, $100 par Retained eamings Net income No dividends on common stock were dedared between 20Y3 and 20Y5. a. Determine the return on total assets, the returm on stockholders' equity, and the return on common stockholders' equity for the years 20Y4 and 20Y5. Round your percentage answers to one decimal place. $183,000 60,000 24,000 12,000 68,000 14,880 $165,000 60,000 24,000 12,000 54,000 12,720 $147,000 60,000 24,000 12,000 36,000 10,176 20YS 20Y4 Return on total asset:s Return on stockholders' equity Return on common stockholders' equity b. What conclusions can be drawn from these data as to the company's profitability? Since the rate of return on assets exceeds the cost of debt in both years, there is positive leverage from the use of debt. 0.081 x %

Explanation / Answer

Answer a

Return on Total Assets = EBIT / Average Total Assets

EBIT = Net Income + Interest ; Average Tatal Assets = Current Year Total Asset + Last year Total Assets / 2

For 20Y5

EBIT = $14,880 + ($60,000 * 10%) = $20,880

Average Tatal Assets = $183,000 + $165,000 / 2 = $174,000

Return on Total Assets = $20,880 / $174,000 = 12%

For 20Y4

EBIT = $12,720 + ($60,000 * 10%) = $18,720

Average Tatal Assets = $165,000 + $147,000 / 2 = $156,000

Return on Total Assets = $18,720 / $156,000 = 12%

Return on Stockholder 's equity = Net Income / Average Stockholder's Equity

Stockholder Equiry = Common Stock + Preferred Stock + Retained Earning

For 20Y5

Average Stockholder's equity = $104,000 + $90,000 / 2 = $97,000

Return on Stockholder 's equity = $14,880 / $97,000 = 15.3 %

For 20Y4

Average Stockholder's equity = $90,000 + $72,000 / 2 = $81,000

Return on Stockholder 's equity = $12,720 / $81,000 = 15.7 %

Return on Common Stockholder's equity =

Net Income - Preferred Dividends / Average Common Stock Equity

Common Stock Equity = Common Stock + Retained Earning

For 20Y5

Average Common Stock Equity = $92,000 + $78,000 / 2 = $85,000

Return on Common Stockholder's equity = $14,880 - ($12,000 * 4 %) / $85,000 = 16.9 %

For 20Y4

Average Common Stock Equity = $78,000 + $60,000 / 2 = $69,000

Return on Common Stockholder's equity = $12,720 - ($12,000 * 4 %) / $69,000 = 17.7 %

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