Answered

The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2 Year 1 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 65,000 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 in excess of par—Common stock 75,000 75,000 Retained earnings 310,000 210,000 Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2? a.14.5% b.16.04% c.13.8% d.6.9%

Answer :

TomShelby

Answer:

b.16.04%

Explanation:

We solve for the average equity throughout the year:

common stock (600,000 + 600,000) / 2 = 600,000

paid in                (75,000 + 75,000/ 2 = 75,000

Retained Earnings (310,000 + 210,000) / 2 = 260,000

Average equity: 935,000

The equity return will be the net income over the average equity

interest to debtholders are paid before earnings are available to shareholders so we do not remove them.

150,000 / 935,000 = 0,1604278

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