The Imagination Studios, Inc., produces television shows. The company earned $300,000 and $400,000 in 2006 and 2007, respectively. The company had total assets of $4,000,000 and total liabilities of $1,000,000 on January 1, 2006. The company had no investing or financing transactions during 2006. On July 1, 2007, the company purchased studio property for $3,000,000 by issuing debt for the same amount.

a. Determine the average total assets and average stockholders’ equity for 2006 and 2007.

b. Calculate the rate earned on total assets and rate earned on stockholders’ equity for 2006 and 2007. Round to one decimal place.

c. Why did the profits increase from 2006 to 2007, but the rate earned on total assets decrease?

d. Why did the difference between the rate earned on stockholders’ equity and rate earned on total assets increase from 2006 to 2007?