Profitability Ratios The following selected data were taken from the financial s

Question

Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

The 20Y7 net income was $372,000, and the 20Y6 net income was $492,000. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.

a. Determine the return on total assets, the rate earned on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. Round to one decimal place.

b. The profitability ratios indicate that Vidahill Inc.'s profitability has deteriorated . Because the rate of return on common stockholders' equity exceeds the rate earned on total assets in both years, there is positive leverage from the use of debt.

I only need the return on total assets, please.

December 31 20Y7 20Y6 20Y5 Total assets $4,800,000 $4,400,000 $4,000,000 Notes payable (8% interest) 2,250,000 2,250,000 2,250,000 Common stock 250,000 250,000 250,000 Preferred 4% stock, $100 par (no change during year) 500,000 500,000 500,000 Retained earnings 1,574,000 1,222,000 750,000

Explanation / Answer

Return on Total assets is a ratio that measures a company's earnings before interest and taxes (EBIT) against it's total net assets.

Therefore

Return on total assets = EBIT / Total net assets

where,

EBIT = Net income + Interest expense + Taxes

For 2016,

change in retained earnings + Preferred stock dividend = 1222000- 750000+20000

= 472000 + 20000 = 492000($)

Since in the given question taxes can't be calculated therefore

return on total assets is after tax = net income / total assets

for 2006 = 492000/4400000

=11.2%

for 2007 = 372000/ 4800000

= 7.8%

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