Question

Exercise 15-20 Presented below is information from the annual report of Blue Plastics, Inc. Operating income $583,200 Bond interest expense 134,930 448,270 Income taxes 268,427 Net income $179,843 Bonds payable $1,030,000 Common stock 837,000 Retained earnings 370,000 (a) Compute the return on common stockholders’ equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.) (Round answers to 1 decimal place, e.g. 16.8%.) Rate of return on common stock equity % Rate of interest paid on bonds payable % (b) Is Blue Plastics, Inc. trading on the equity successfully? NoYes LINK TO TEXT Question Attempts: 0 of 3 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

(a) Computation of the return on common stockholders’ equity and the rate of interest paid on bonds:-
Return on common stockholders' equity	=	Net Income	×	100
		Average Shareholders' Equity
Return on common stockholders' equity	=	$179,843	×	100
		837000+370000
Return on common stockholders' equity	=	$179,843	×	100
		$1,207,000
Return on common stockholders' equity	=	14.9%
Rate of interest paid on bonds payable	=	Bond interest expense	×	100
		Average Bonds payable
Rate of interest paid on bonds payable	=	$134,930	×	100
		$1,030,000
Rate of interest paid on bonds payable	=	13.1%
(b) Yes, Blue Plastics Inc. is trading on the equity successfully because rate of interest paid on bonds payable is less than the return on commmon stockholders' equity. The common stockholders are getting the benefit of increased income due to lower cost of debt funding.

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