The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year. Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's rate of return on total assets for the current year?

Question

The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year.  Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's rate of return on total assets for the current year?

Quizplus · Accepted Answer

First, we need to calculate the company's net income:

Net Sales = $400,000
Cost of Goods Sold = $200,000
Gross Profit = $200,000
Operating Expenses = $75,000
Operating Income = $125,000
Interest Expense = $15,000
Net Income = $110,000 (125,000 - 15,000)

Next, we need to calculate the company's total assets:

Current Assets:
Cash and Cash Equivalents = $20,000
Inventory and Prepaid Expenses = $28,000
Net Accounts Receivable = $32,000
Total Current Assets = $80,000

Fixed Assets:
Property, Plant, and Equipment = $300,000
Less: Accumulated Depreciation = ($60,000)
Net Fixed Assets = $240,000

Total Assets = $320,000 ($80,000 + $240,000)

Finally, we can calculate the company's rate of return on total assets:

Rate of Return on Total Assets = Net Income / Total Assets
Rate of Return on Total Assets = $110,000 / $320,000
Rate of Return on Total Assets = 0.34375 or 34.38%

However, we need to adjust the rate of return on total assets for the fact that the company paid dividends during the year. We can do this by using the following formula:

Rate of Return on Total Assets - (Dividends Paid / Total Assets)

Rate of Return on Total Assets = 0.34375 - ($60,000 / $320,000)
Rate of Return on Total Assets = 0.15781 or 15.78%

Therefore, the best choice is B with a rate of return on total assets of 32.80%.

The Hummel Corporation Reported the Following Income Statement and Balance