Question

Exercise 15-19 Shown below is the liabilities and stockholders' equity section of the balance sheet for Crane Company and Cheyenne Company. Each has assets totaling $4,399,000 CheyenneCo. Crane Co. Current liabilities $320,000 Current liabilities $810,000 Long-term debt, 9% 1,320,000 Common stock ($20 par) 2,830,000 Common stock ($20 par) 2,000,000 Retained earnings (Cash dividends, $353,000) 759,000 Retained earnings (Cash dividends, $217,000) 759,000 $4,399,000 $4,399,000 For the year, each company has earned the same income before interest and taxes. Cheyenne Co Crane Co. Income before interest and taxes $1,100,000 $1,100,000 Interest expense 118,800 0 981,200 1,100,000 Income taxes (45%) 441,540 495,000 $539,660 $605,000 Net income At year end, the market price of Crane's stock was $101 per share, and Cheyenne'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, e.g. 16.85%.) Return on total assets Crane Company Cheyenne Company Which company is more profitable in terms of return on total assets? (b) Calculate the return on common stock equity? (Round answers to 2 decimal places, e.g. 16. 85 %.) Return on common stock equity Crane Company % Cheyenne Company % Which company is more profitable in terms of return on common stockholders' equity?

Answer 1

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	Amount $
Statement of Earnings	Crane Co.	Cheyenne Co.			Ans a	Crane	Cheyenne Co.
Income before interest and taxes	1,100,000.00	1,100,000.00			Return on Total Assets
Interest Expense	118,800.00	-			Net Income/ Total Assets	12.27%	13.75%	A/G
Net Income before taxes	981,200.00	1,100,000.00			Cheyenne Co. is more profitable in terms of Return on Total Assets.
Income taxes at 45%	441,540.00	495,000.00
Net Income	539,660.00	605,000.00	A		Ans b
					Return on Total Stockholders' Equity
Liabilities & Stockholders' Equity	Crane	Cheyenne Co.			Net Income/ Total Stockholders' Equity	19.56%	16.86%	A/C
Current Liabilities	320,000.00	810,000.00			Crane Co. is more profitable in terms of Return on Total Stockholders' Equity.
Long Term Debt 9%	1,320,000.00	-
Total Liabilities	1,640,000.00	810,000.00			Ans c
Common Stock ($ 20 par)	2,000,000.00	2,830,000.00	B		Net Income per share
Retained Earnings	759,000.00	759,000.00			Net Income/Number of Common Share	5.40	4.28	A/F
Total Stockholders' Equity	2,759,000.00	3,589,000.00	C		Crane Co. has greater Net Income per share of stock.
Total Liabilities & Stockholders' Equity	4,399,000.00	4,399,000.00	D
					Ans d 1
Market price of common share	101.00	63.50			The net income of Crane Co. is $ 539,660.
					Long Term Debt of Crane Co. is $ 1,320,0000.
Common Stock	2,000,000.00	2,830,000.00	B		Crane company's return on equity is much better. So its advisable to retire long term debt as it will improve the net income.
Par Value	20.00	20.00	E
Number of common shares	100,000.00	141,500.00	F=B/E		Ans 1 e
					Book Value per share of common stock
Total Assets	4,399,000.00	4,399,000.00	G		Total Stockholders' Equity/Number of Common Share	27.59	25.36	C/F