[imailin]

balance sheet as follows:

2004 2033
total current assets_______________600,000 560,000
total investments ______________60,000 40,000
total property, plant and equipment__900,000 700,000
Total Current liability _____________150,000 80,000
Total long term liabilities __________350,000 250,000
Preferred 9% stock, $100 par ______100,000 100,000
Common stock $10 par ___________600,000 600,000
Paid in capital I'm excess of par
common stock___________________60,000 60,000
Retained earnings _________________325,000 210,000

If net income is $130,000 and interest expenses is $40,000 for 2004 what is the rate earned on total assets for 2004? And what is the rate earned on common stockholders' equity for 2004?


possible asnwers:
10.9%
11.9%
9.1%
8.3%?



Please, for some reason the formula income / current assets = 130,000 / 600,000 =0.21 does not match any answer... why?
and the formula : income - (dividends) / common stock = I can not figured aut what would I put instead of dividens??

thanks!

[morgaine300]

Well, the second formula is income - preferred dividends/common stockholders equity, not common stock. Notice the formula is the rate earned on common stockholder equity. The common stockholders have more that their stock account. First, the excess is actually part of what they paid in and is part of their investment. (It's just separated out into par and excess of par.) And the retained earnings also 'belongs' to them. What doesn't belong to them is the preferred stock. Stockholders equity is 1,085,000. Common stockholders equity is less the preferred stock.

As for the first one, total assets is not the same as current assets. You used only current assets.

Now, there's a trick to that one. I don't have all these formulas memorized. (Especially given that different sources can do them differently, and there's a billion of them.) But I know there are times when you add back in the interest expense to net income. The return on assets could be one of those, but I'm not sure. And I checked it both ways, and both answers are in there. Meaning they're putting them both in on purpose to see if you know which it is. You're going to have to look that up and make absolutely sure you've got the right equation. They gave the interest expense, but that may have been to throw you off.