Return Ratios and Leverage The following selected data are taken from the financ

Question

Return Ratios and Leverage

The following selected data are taken from the financial statements of Redwood Enterprises:

Required:

1. Compute the following ratios for Redwood Enterprises:

Return on sales

Asset turnover (Assume that total assets at the beginning of the year were $1,600,000.)

Return on assets

Return on common stockholders' equity (Assume that the only changes in stockholders' equity during the year were from the net income for the year and dividends on the preferred stock.)

When computing percentage amounts, carry out calculations to four decimal places, but enter your answers to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86.

2. Has it successfully employed leverage?
- Select your answer -YesNo

Sales revenue $644,000 Cost of goods sold 379,000 Gross profit $265,000 Selling and administrative expense 100,000 Operating income $165,000 Interest expense 50,000 Income before tax $115,000 Income tax expense (40%) 46,000 Net income $69,000 Accounts payable $45,000 Accrued liabilities 70,000 Income taxes payable 10,000 Interest payable 25,000 Short-term loans payable 150,000 Total current liabilities $300,000 Long-term bonds payable $500,000 Preferred stock, 10%, $100 par $250,000 Common stock, no par 600,000 Retained earnings 350,000 Total stockholders' equity $1,200,000    Total liabilities and stockholders' equity $2,000,000

Explanation / Answer

1. Return on sales=Operating income/sales=165,000/644,000= 0.2562=25.62%

Avg Assets=(1,600,000+2,000,000)/2=1,800,000

Asset turnover=Sales/Avg. Assets=644,000/1,800,000= 0.36

Return on assets=Net Income/Avg. Assets=69,000/1,800,000=0.0383=3.83%

stockholders' equity at begining of year=1,200,000-(69,000-2500)=1133500

Avgequity= (1133500+1,200,000)/2=1166750

Return on common stockholders' equity=Net Income/Avgequity=69,000/1166750=0.05914=5.91%

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