entld 698018 CengageNowv2 1 Online teaching and learning resource from Cengage L

Question

entld 698018 CengageNowv2 1 Online teaching and learning resource from Cengage Leaming 6. EX.14-17ALGO (Algorithmic) Show Me How Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 207, 20Y6, and 20YS December 31 0Y7 20YS zoYS Total assets Notes payable (8% interest) Common stock Preferred 6% stock, $100 par 191,000 60,000 24,000 12,000 153,000 60,000 4,000 12,000 172,000 24,000 12,000 (no change during year) Retained earnings 74,730 48,780 The 20Y7 net income was $26,670, and the 20ve net income was $13,500. No dividends on common stock were dectked between 20ys and and 20Y7 20Y7, Preferred dividends were declared and paid in futlin 20Ys a. Determine the return on total assets, the rate arned on stocshoides equity, and the retum on common stockholders' equity for the r years 20Y6 and 20Y7, When required, round to one decimal place 20Y7 oYS Return on total assets Return on stockholders equity Return on common stockholders' equity b. The profitability ratios indicate that Vidahil Inc.'s profngbility has return on stocknoiders' equity in both years "Since the rate of return on assets is Severace from the use of debe

Explanation / Answer

Return on assets = net income / Average total assets 2007 2006 Net income 26670 13500 Beginning total assets 172000 153000 Ending total assets 191000 172000 Average total assets 181500 162500 Return on assets 14.7% 8.3% Return on shareholders equity = net income / Average shareholders equity 2007 2006 Net income 26670 13500 Beginning stockholders equity 84780 72000 Ending stockholders equity 110730 84780 Average stockholders equity 97755 78390 Return on stockholders equity 27.3% 17.2% Return on commonstockholders equity = net income / average common stockholders equity 2007 2006 Net income 26670 13500 Less Preferred dividend 720 720 (12000*6%) Net income available for common stock 25950 12780 Beginning common stockholders equity 72780 60000 Ending common stockholders equity 98730 72780 Average common stockholders equity 85755 66390 Return on common stockholders equity 30.3% 19.2% Stockholders equity 2007 2006 2005 Common stock 24000 24000 24000 Preferred stock 12000 12000 12000 Retaied earnings 74730 48780 36000 Total stockholders equity 110730 84780 72000 Stockholders equity 2007 2006 2005 Common stock 24000 24000 24000 Retaied earnings 74730 48780 36000 Total common stockholders equity 98730 72780 60000 2 Profitability has increase Return on asset is lower as compared to stockholders Lower

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