Question

Shown below is the liabilities and stockholders' equity section of the balance sheet for Martinez Company and Sandhill Company. Each has assets totaling $4,022,000 Martinez Co. Current liabilities Long-term debt, 10% Common stock ($20 par) Retained earnings (Cash dividends, $232,000) $324,000 1,090,000 1,860,000 748,000 $4,022,000 SandhillCo. Current liabilities Common stock ($20 par) Retained earnings (Cash dividends, $334,000) $194,000 3,080,000 748,000 $4,022,000 For the year, each company has earned the same income before interest and taxes. Income before interest and taxes Interest expense Martinez Co. Sandhill Co. $1,180,000 $1,180,000 109,000 1,071.000 1.180,000 481,950 531,000 SS89050 $649,000 Income taxes (45%) Net Income At year end, the market price of Martinez's stock was $101 per share, and Sandhill's was $63.50. Assume balance sheet amounts are representative for the entire year (a) Calculate the return on total assets? (Round answers to 2 decimal places, eg. 16.85%) Return on total assets Martinez Company Sandhill Company

Answer 1

a)	Martinez Co.	Sandhil Co.
Earnings before interest and taxes (a)	$1,180,000	$1,180,000
Total Assets (b)	$4,022,000	$4,022,000
Return on total assets (a/b*100)	29.34%	29.34%
Both companies are equally profitable at 29.34% because both companies have same earnings before interest ad taxes and total assets.
b)	Martinez Co.	Sandhil Co.
Net Income (a)	$589,050	$649,000
Shareholders' Equity (b) ($1,860,000 + $748,000); ($3,080,00 + $748,000) (b)	$2,608,000	$3,828,000
Return on common stock equity (a/b*100)	22.59%	16.95%
Martinez Co. is more profitable in terms of return on common stockholders' equity because its percentage of 22.59% is high compare with Sandhil Co. of 16.95%.
c)	Martinez Co.	Sandhil Co.
Net Income	$589,050	$649,000
Less: Preferred dividends	$0	$0
Earnings available to common stockholders' equity (a)	$589,050	$649,000
Weighted number of shares (b) ($1,860,000/$20); ($3,080,000/$20)	93,000	154,000
Net Income per share (a/b)	$6.33	$4.21
Martinez Co. has higher net income per share of $6.33 compare with Sandhil Co. net income per share of $4.21.
d1)
Yes, it is advantageous to the stockholders' of Martinez Co. to have the long-term debt outstanding because it is more profitable compare with Sandhil Co.
e)	Martinez Co.	Sandhil Co.
Total shareholders' Equity (b) ($1,860,000 + $748,000); ($3,080,00 + $748,000) (a)	$2,608,000	$3,828,000
Weighted number of shares (b) ($1,860,000/$20); ($3,080,000/$20)	93,000	154,000
Book value per share (a/b)	$28.04	$24.86