Question

the data were taken from the financial statements of vidahill Inc for December 41 20Y7,20Y6,20Y5
total assets 20Y7 5200000 20y6 5000000 20y5 4800000.notes payable (6%)interest 20Y7 2500000 20y6 2500000 y 20y5 2500000 common stock 250000 each year preferred 2.5%,100par (no change during the year) each year 500000. retained earnings 20Y7 1574000 year 20y6 1222000 20y5 750000.the 20Y7 net income was $411000 and the 20y6 net income was $462500.no dividends on common stock were declared between 20y5 and 20y7.preferred dividends were declared and paid in full in 20y6 and 20y7.
a.determine the return on total assets,the return on stock holders equity and the return on common stock stockholders equity for the years 20y6 and 20y7.round percentages to one decimal place.
b.the profability ratios indicate that the company's profitability has.          .because the return on common stock holders equity.      the return on total assets in both years there is. . leverage from the use of debt.

Answer 1

Years	2007	2006	2005
TOTAL ASSETS	5200000	5000000	4800000
NOTES PAYABLE	2500000	2500000	2500000
INTEREST @6%	150000	150000	150000
COMMON STOCK	250000	250000	250000
PREFERENCE STOCK	500000	500000	500000
PREFERENCE DIVIDENDS	12500	12500	12500
RETAINED EARNIGNS	1574000	1222000	750000
NET INCOME	411000	462500
A.
RETURN ON TOTAL ASSETS
	2007	2006
NET INCOME	411000	462500
Add:Interest	150000	150000
Total (A)	561000	612500
Average total asset(B)	5100000	4900000
ROA(A/B)	11.00%	12.50%
RETURN ON equity
	2007	2006
NET INCOME (A)	411000	462500
Average total equity	2148000	1736000
	(250000+500000+1574000+250000+500000+1222000)/2	(250000+500000+1574000+250000+750000+1222000)/2
ROE(A/B)	19.13%	26.64%
return on common stockholders equity
	2007	2006
NET INCOME	411000	462500
Less:preference dividend	12500	12500
Total (A)	423500	475000
average common stockholders equity(b)	1648000	1236000
ROE (A/B)	25.70%	38.43%
common stock	250000	250000	250000
retained earnings	1574000	1222000	750000
average 2007	1648000
average 2006	1236000
ques 2
The profitability ratios indicate that Viadhills profitability has deteriorated. Most of this change is from net income falling from $4625,000 in 2006 to$411,000 in 2007. The cost of debt is 6%. Since the rate of return on assets exceeds this amount in either year, there is positive leverage from use of debt. However, this leverage is greater in 2006 because the rate of return on assets exceeds the cost of debt by a greater amount in 2006.