Question
Return Ratios and Leverage The following selected data are taken from the financial statements of Cedar Industries: Sales revenue $659,000 Cost of goods sold 390,000
- Return Ratios and Leverage
- The following selected data are taken from the financial statements of Cedar Industries:
-
Sales revenue $659,000 Cost of goods sold 390,000 Gross profit $269,000 Selling and administrative expense 100,000 Operating income $169,000 Interest expense 50,000 Income before tax $119,000 Income tax expense (40%) 47,600 Net income $71,400 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 - Required:
- 1. Compute the following ratios for Cedar Industries:
- 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.
a. Return on sales | % | |
b. Asset turnover (round to 2 decimal places) | times | |
c. Return on assets | % | |
d. Return on common stockholders' equity | % |
2. Comment on Evergreens use of leverage. Has it successfully employed leverage?
- Yes, Evergreen has successfully employed leverage because; the return on the stockholders funds is less than the return to all the providers of capital.
- No, Evergreen has not successfully employed leverage because; the return on the stockholders funds is less than the return to all the providers of capital.
- Yes, Evergreen has successfully employed leverage because; amount of stockholders funds is less than the amount of outside funds.
- No, Evergreen has not successfully employed leverage because; amount of stockholders funds is less than the amount of outside funds.
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The following selected data are taken from the financial statements of Cedar Industries:
Sales revenue | $659,000 | |
Cost of goods sold | 390,000 | |
Gross profit | $269,000 | |
Selling and administrative expense | 100,000 | |
Operating income | $169,000 | |
Interest expense | 50,000 | |
Income before tax | $119,000 | |
Income tax expense (40%) | 47,600 | |
Net income | $71,400 | |
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 |
Required:
1. Compute the following ratios for Cedar Industries:
- Return Ratios and Leverage
- 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.
a. Return on sales |
| % |
b. Asset turnover (round to 2 decimal places) |
| times |
c. Return on assets |
| % |
d. Return on common stockholders' equity |
| % |
2. Comment on Evergreens use of leverage. Has it successfully employed leverage?
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