The following financial information is for A. Galler Company for 2011 2010 2009
ID: 2660737 • Letter: T
Question
The following financial information is for A. Galler Company for 2011 2010 2009
Income before interest: 2011-4400000 2010-4000000 2009-3300000
Interest expense: 2011-800000 2010-600000 2009-550000
Income before tax: 2011-3600000 2010-3400000 2009-2750000
Tax: 2011-1500000 2010-1450000 2009-1050000
Net Income: 2011-2100000 2010-1950000 2009-1700000
Current Liabilities: 2011-2600000 2010-2300000 2009-2200000
Long-Term Debt: 2011-7000000 2010-6200000 2009-5800000
Preferred Stock(14%) 2011-100000 2010-100000 2009-100000
Common Equity: 2011-10000000 2010-9000000 2009-8300000
Required:
a. For 2011 2010 and 2009 determine the following
1. Return on assets(using end of year total assets)
2. Return on investment(using end of year long term liabilities and equity)
3. Return on total equity(using ending total equity)
4. Return on common equity(using ending common equity)
b. discuss the trend in these profit figures
c. discuss the benefit from the use of long-term debt and preferred stock
Explanation / Answer
Income before interest: 2011-4400000 2010-4000000 2009-3300000
Interest expense: 2011-800000 2010-600000 2009-550000
Income before tax: 2011-3600000 2010-3400000 2009-2750000
Tax: 2011-1500000 2010-1450000 2009-1050000
Net Income: 2011-2100000 2010-1950000 2009-1700000
Current Liabilities: 2011-2600000 2010-2300000 2009-2200000
Long-Term Debt: 2011-7000000 2010-6200000 2009-5800000
Preferred Stock(14%) 2011-100000 2010-100000 2009-100000
Common Equity: 2011-10000000 2010-9000000 2009-8300000
Required:
a. For 2011 2010 and 2009 determine the following
1. Return on assets(using end of year total assets)
Total asset = Total equity + total debt
Return on assets 2011 = net income/total asset = 2100000/(2600000+7000000+100000+10000000) = 10.66%
Return on assets 2010 = net income/total asset = 1950000/(2300000+6200000+100000+9000000) = 11.08%
Return on assets 2009 = net income/total asset = 1700000/(2200000+5800000+100000+8300000) = 10.37%
2. Return on investment(using end of year long term liabilities and equity)
Total investment= Total equity + total long term debt
Return on investment 2011 = net income/Total investment = 2100000/(7000000+100000+10000000) = 12.28%
Return on investment 2010 = net income/Total investment = 1950000/(6200000+100000+9000000) = 12.75%
Return on investment 2009 = net income/Total investment = 1700000/(5800000+100000+8300000) = 11.97%
3. Return on total equity(using ending total equity)
Return on equity 2011 = net income/total equity = 2100000/(100000+10000000) = 20.79%
Return on equity 2010 = net income/total equity = 1950000/(100000+9000000) = 21.435%
Return on equity 2009 = net income/total equity = 1700000/(100000+8300000) = 20.24%
4. Return on common equity(using ending common equity)
Return on common equity 2011 = net income/total common equity = 2100000/(10000000) = 21%
Return on common equity 2010 = net income/total common equity = 1950000/(9000000) = 21.67%
Return on common equity 2009 = net income/total common equity = 1700000/(8300000) = 20.48%
b. discuss the trend in these profit figures
All the return ratios have increased from 2009 to 2010 and then declined in 2011.
c. discuss the benefit from the use of long-term debt and preferred stock
benefit from the use of long-term debt
Long-term debt is usually tied to large up-front payouts used for major purchases and acquisitions. Normally, companies use major loans to buy new buildings or equipment, or to invest in product research and development, or to acquire another company. The financing allows you to invest in these growth-oriented purchases that you would otherwise have to wait years for by slowly saving profits over time.
Long-term debt financing usually has some financial benefits relative to short-term debt. Interest rates are normally lower because long-term loans are usually secured with property. If you buy a building, for instance, your building loan is secured by the property. While this exposes your purchase to repossession, it lowers the bank's risk and makes it more willing to offer a more attractive interest rate than for an unsecured loan.
Long-term financing provides businesses and individuals with a more stable debt management instrument than a short-term loan. Unlike certain short-term loans--such as credit from a supplier--which may be recalled at short notice due to lack a formal agreement, long-term loans are detailed in formal contracts, and the installments are either at a fixed rate or at a variable rate determined by the market. Long-term financing allows borrowers to have more security when budgeting for costs and expenses.
Preferred stocks are a hybrid type of security that includes properties of both common stocks and bonds. One advantage of preferred stocks is their tendency to pay higher and more regular dividends than the same company's common stock. Preferred stock typically comes with a stated dividend. The company is not obligated to pay the dividend, and is not considered in default if it misses a preferred dividend payment as it would be if it missed a bond payment. The company is obligated to pay any missed preferred dividend payments before it makes any dividend payment on its common stock.
Both bonds and preferred stocks are considered fixed income securities because the amount of regular interest or dividend payments is a known factor. The market price of both bonds and preferred stocks is heavily influenced by movements in prevailing interest rates. Unlike bonds, which are debt instruments and don't confer any ownership in the company, preferred stocks are equity instruments. Preferred shareholders own a piece of the company. If the company does well, the value of the preferred stock can appreciate independently of interest rate movements.
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