Cepeda Company manufactures backpacks. During 2014, Cepeda issued bonds at 11% i

Question

Cepeda Company manufactures backpacks. During 2014, Cepeda issued bonds at 11% interest and used the cash proceeds to purchase treasury stock. The following financial information is available for Cepeda Company for the years 2014 and 2013.

2014

2013

(a) Use the information above to calculate the following ratios for both years: (Round answers to 1 decimal place, e.g. 12.5% or 12.5.)

2014

2013

2014

2013

Sales revenue $12,420,000 $12,420,000 Net income 3,091,200 3,450,000 Interest expense 1,413,000 395,640 Tax expense 924,600 1,035,000 Dividends paid on common stock 2,515,140 2,899,476 Dividends paid on preferred stock 847,800 847,800 Total assets (year-end) 20,010,000 23,287,500 Average total assets 44,332,875 50,198,238 Total liabilities (year-end) 16,956,000 8,478,000 Avg. total common stockholders’ equity 26,564,400 39,846,600

Explanation / Answer

Dear Student,

2014 2013 (i) Return on assets (Net Income/ Average total assets) = 3,091,200/44,332,875 =3,450,000/50,198,238 7.0% 6.9% (ii) Return on common stockholders' equity = (3,091,200-847,800)/26,564,400 =(3,450,000-847,800)/39,846,600 (Net Income-Preferred Dividend/ Average common stockholders' equity) 8.5% 6.5% (iii) Payout Ratio (Total Dividend/Net Income) = (2,515,140+847,800)/(3,091,200) =(2,899,476+847,800)/3,450,000 108.8% 108.6% (iv) Debt to Asset Ratio =16,956,000/20,010,000 =8,478,000/23,287,500 (Total Debt/Total Assets) 0.8 0.4 (v) Times interest earned =(3,091,200+1,413,000+924,600)/1,413,000 =(3,450,000+395,640+1,035,000)/395,640 (Income before Interest & Tax/ Interest Expense) 3.8 times 12.3 times

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