The following selected data were taken from the financial statements of Vidahill

Question

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, an 20Y6 20YS Total assets Notes payable (8% interest) Common stock Preferred 4% stock, $100 par $205,000$185,000 70,000 28,000 14,000 70,000 28,000 14,000 $165,000 70,000 28,000 14,000 (no change during year) earnings 79,480 51,940 42,000 The 20Y7 net income was $28,100, and the 20Y6 net income was $10,500. No dividends on common stock were ded a. Determine the return on total assets, the rate earned on stockholders equity, and the return on common stockhol 20Y7 20Y6 Return on stockholders' equity equity ty has improved V . Since the rate of return on ass

Explanation / Answer

Answer to Part a.

Return on Total Assets = Net Income / Average Total Assets

20Y7:
Average Total Assets = (185,000 + 205,000)/ 2
Average Total Assets = $195,000

Return on Total Assets = 28,100 / 195,000 * 100
Return on Total Assets = 14.41%

20Y6:
Average Total Assets = (185,000 + 165,000)/ 2
Average Total Assets = $175,000

Return on Total Assets = 10,500 / 175,000 * 100
Return on Total Assets = 6.00%

Answer to Part b.

Return on Stockholders’ Equity = Net Income / Average Total Stockholders’ Equity
Total Stockholders’ Equity = Common Stock + Preferred Stock + Retained Earnings

20Y7:
Total Stockholders’ Equity, 20Y7 = $28,000 + $14,000 + $79,480
Total Stockholders’ Equity, 20Y7 = $121,480

Total Stockholders’ Equity, 20Y6 = $28,000 + $14,000 + $51,940
Total Stockholders’ Equity, 20Y6 = $93,940

Average Total Stockholders’ Equity = (121,480 + 93,940) / 2
Average Total Stockholders’ Equity = $107,710

Return on Stockholders’ Equity = 28,100 / 107,710 * 100
Return on Stockholders’ Equity = 26.09%

20Y6:
Total Stockholders’ Equity, 20Y5 = $28,000 + $14,000 + $42,000
Total Stockholders’ Equity, 20Y5 = $84,000

Average Total Stockholders’ Equity = (93,940 + 84,000) / 2
Average Total Stockholders’ Equity = $88,970

Return on Stockholders’ Equity = 10,500 / 88,970 * 100
Return on Stockholders’ Equity = 11.80%

Answer to Part c.

Return on Common Stockholders’ Equity = (Net Income – Preferred Dividend) / Average Total Common Stockholders’ Equity
Total Common Stockholders’ Equity = Common Stock + Retained Earnings

20Y7:
Total Common Stockholders’ Equity, 20Y7 = $28,000 + $79,480
Total Common Stockholders’ Equity, 20Y7 = $107,480         

Total Common Stockholders’ Equity, 20Y6 = $28,000 + $51,940
Total Common Stockholders’ Equity, 20Y6 = $79,940

Average Total Common Stockholders’ Equity = (107,480 + 79,940) / 2
Average Total Common Stockholders’ Equity = $93,710

Preferred Dividend = $14,000 * 4% = $560

Return on Common Stockholders’ Equity = (28,100 – 560) / 93,710 * 100
Return on Common Stockholders’ Equity = 29.39%

20Y6:
Total Common Stockholders’ Equity, 20Y5 = $28,000 + $42,000
Total Common Stockholders’ Equity, 20Y5 = $70,000

Average Total Common Stockholders’ Equity = (79,940 + 70,000) / 2
Average Total Common Stockholders’ Equity = $74,970

Preferred Dividend = $14,000 * 4% = $560

Return on Common Stockholders’ Equity = (10,500 – 560) / 74,970 * 100
Return on Common Stockholders’ Equity = 13.26%

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