Question

45. FINANCIAL RATIOS DuBois Furniture, Inc., reported these figures for 20x7 and 20x6: Income statement: 20x7 20x6 Net income 12,000,000 18,700,000 Balance sheet: Preferred stock, $1.30, no-par, 100,000 shares issued and outstanding . Common stockholders' equity . .. 2,500,000 2,500,000

Note: Can you put this answer on Microsoft Excel !

Answer 1

Return on total assets (ROTA) = Earnings before Interest and Taxes (EBIT)/ Total Net Assets * 100

The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid.

EBIT= Net income + interest expenses

        =$ 17,400,000 + $12,000,000

        = $ 29,400,000

Total Net Assets= $ 351,000,000

Return on total assets (ROTA) = $ 29,400,000 / $ 351,000,000 * 100

                                                     =8.38%

Return on common stockholders= (Net Income- Preferred Dividend)/ Common Stockholders equity * 100

This ratio indicates how much return the equity shareholders have earned during the year on their investment in % terms

Return on common stockholders = ( $12,000,000 - $1.3 * 100,000) / $ 164,000,000 * 100

                                                          = 7.23%

This rates of return suggest strength as the return is positive.