The financial statements for Castile Products, Inc., are given below: Castile Pr

Question

The financial statements for Castile Products, Inc., are given below: Castile Products, Inc. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable, net Merchandise inventory Prepaid expenses $ 20,000 230,000 360,000 9,000 Total current assets Property and equipment, net 619,000 810,000 Total assets $1,429,000 Liabilities and Stockholders' Equity Liabilities Current liabilities Bonds payable, 11% $ 290,000 340,000 630,000 $ 160,000 Total liabilities Stockholders' equity: Common stock, $10 par value Retained earnings 639,000 799,000 $1,429,000 Total stockholders' equity Total liabilities and stockholders' equity

Explanation / Answer

SOLUTION

Return on total assets = [Net Income + (Interest expense * (1-tax rate))] / Average total assets

= [$218,820 + ($37,400 * (1-0.30))] / [($1,010,000 + 1,429,000)/2]

= ($218,820 + $26,180) / ($2,439,000 / 2)

= $245,000 / $1,219,500 = 20%

Return on Equity = (Net Income - Preferred dividend) / Average common stockholder's equity

= ($218,820 - $0) / [($685,000+$799,000)/2]

= $218,820 / $742,000

= 29.5%

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