Question

Six Measures of Solvency or Profitability

The following data were taken from the financial statements of Gates Inc. for the current fiscal year.

Property, plant, and equipment (net)						$1,792,000
Liabilities:
	Current liabilities			$224,000
	Note payable, 6%, due in 15 years			1,120,000
	Total liabilities					$1,344,000
Stockholders' equity:
	Preferred $4 stock, $100 par (no change during year)					$2,016,000
	Common stock, $10 par (no change during year)					2,016,000
Retained earnings:
	Balance, beginning of year	$2,150,000
	Net income	698,000		$2,848,000
	Preferred dividends	$80,640
	Common dividends	79,360		160,000
	Balance, end of year					2,688,000
Total stockholders' equity						$6,720,000
Sales						$25,664,350
Interest expense						$67,200

Assuming that long-term investments totaled $4,032,000 throughout the year and that total assets were $7,661,000 at the beginning of the current fiscal year, determine the following. When required, round to one decimal place.

a. Ratio of fixed assets to long-term liabilities
b. Ratio of liabilities to stockholders' equity
c. Asset turnover
d. Return on total assets	%
e. Return on stockholders’ equity	%
f. Return on common stockholders' equity	%

Answer 1

Requirement: a Fixed Assets to long term liabilities = Fixed Assets / Long term Liabilities Fixed Assets Long term Liabilities Fixed Assets to long term liabilities 1792000 1120000 1.6 Requirement: b Liabilities to stockholders Equity = Total Liabilities / Stockholders Equity Total Liabilities Stockholders Equity Liabilities to stockholders Equity 1344000 6720000 0.2 Requirement: Assets Turn over = Net sales / Average Total Assets Net Sales Average Total Assets Assets Turn over 25664350 3830500 6.7

Requirement: Return on Total Assets = Net Income / Average Total Assets Net Income Average Total Assets Return on Total Assets 765200 7862500 9.7 % Requirement: e Return on Stockholders Equity = Net Income /Average Stockholders Equity Net Income Average Stockholders Equity Return on Stockholders Equity 698000 6451000 10.8 % Requirement:f Return on Common stockholders Equity = (Net Income - Preference Dividend)/ Average Common stockholders Equity Net Income 698000 Preference Dividend 80640 Average Common stockholders Equity 4435000 Return on Common stockholders Equity 13.9%