Spahn Company manufactures backpacks. During 2017, Spahn issued bonds at 10% interest and used the cash proceeds to purchase treasury stock. The following fi nancial information is available for Spahn Company for the years 2017 and 2016. LO6 2017 2016 Sales revenue $ 9,000,000 $ 9,000,000 Net income 2,240,000 2,500,000 Interest expense 500,000 140,000 Tax expense 670,000 750,000 Dividends paid on common stock 890,000 1,026,000 Dividends paid on preferred stock 300,000 300,000 Total assets (year-end) 14,500,000 16,875,000 Average total assets 15,687,500 17,763,000 Total liabilities (year-end) 6,000,000 3,000,000 Avg. total common stockholders’ equity 9,400,000 14,100,000 Instructions

(a) Use the information above to calculate the following ratios for both years: (1) return on assets, (2) return on common stockholders’ equity, (3) payout ratio, (4) debt to assets ratio, and (5) times interest earned.

(b) Referring to your fi ndings in part (a), discuss the changes in the company’s profi tability from 2016 to 2017.

(c) Referring to your fi ndings in part (a), discuss the changes in the company’s solvency from 2016 to 2017.

(d) Based on your fi ndings in (b), was the decision to issue debt to purchase common stock a wise one?