Question: Hercules Company manufactures raingear. During
Hercules Company manufactures raingear. During 2014, Hercules Company decided to issue bonds at 8% interest and then used the cash to purchase a significant amount of treasury stock. The following information is available for Hercules Company.
Instructions:
(a) Use the information above to calculate the following ratios for both years:
(i) return on assets,
(ii) return on common stockholders’ equity,
(iii) payout ratio,
(iv) debt to assets ratio, and
(v) times interest earned.
(b) Referring to your findings in part (a), discuss the changes in the company’s profitability from 2013 to 2014.
(c) Referring to your findings in part (a), discuss the changes in the company’s solvency from 2013 to 2014.
(d) Based on your findings in (b), was the decision to issue debt to purchase common stock a wise one?
Transcribed Image Text:
2014 2013 $3,000,000 900,000 50,000 190,000 5,610,000 6,230,000 1,200,000 5,250,000 300,000 40,000 Sales revenue $3,000,000 800,000 120,000 166,000 5,000,000 5,312,500 2,000,000 3,322,500 270,000 40,000 Net income Interest expense Тах еxpense Total assets Average total assets Total liabilities Average total stockholders' equity Dividends paid on common stock Dividends paid on preferred stock
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