Profitability Ratios
The following selected data were taken from the financialstatements of Vidahill Inc. for December 31, 20Y7, 20Y6, and20Y5:
| December 31 |
| 20Y7 | 20Y6 | 20Y5 |
| Total assets | $172,000 | | $155,000 | | $138,000 | |
| Notes payable (8% interest) | 60,000 | | 60,000 | | 60,000 | |
| Common stock | 24,000 | | 24,000 | | 24,000 | |
| Preferred 7% stock, $100 par | 12,000 | | 12,000 | | 12,000 | |
| (no change during year) | | | | | | |
| Retained earnings | 73,725 | | 51,135 | | 36,000 | |
The 20Y7 net income was $23,430, and the 20Y6 net income was$15,975. No dividends on common stock were declared between 20Y5and 20Y7. Preferred dividends were declared and paid in full in20Y6 and 20Y7.
a. Determine the return on total assets, thereturn on stockholders' equity, and the return on commonstockholders’ equity for the years 20Y6 and 20Y7. Round percentagesto one decimal place.
| 20Y7 | 20Y6 |
| Return on total assets | | % | | % |
| Return on stockholders’ equity | | % | | % |
| Return on common stockholders’ equity | | % | | % |
b. The profitability ratios indicate that thecompany's profitability has . Since the rate of returnon total assets is the return on stockholders' equity inboth years, there must be leverage from the use ofdebt.
