Question

The balance sheets at the end of each of the first two years of a company's operations indicate the following:

Year 2 Year 1
Total current assets $600,000 $580,000
Total investments 80,000 40,000
Total property, plant, and equipment 935,000 755,000
Total current liabilities 175,000 155,000
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 60,000 60,000
Retained earnings 330,000 210,000

If net income is $145,000 and interest expense is $30,000 for Year 2, what is the return on total assets for Year 2?
a. 19.3%
b. 11.7%
c. 10.8%
d. 29.7%

Answer 1

The return on total assets (ROTA) for the company in Year 2 is 11.7%, calculated by adding net income and interest expense for Year 2 and dividing by the average total assets from Year 1 to Year 2.

Step-by-step explanation:

To calculate the return on total assets (ROTA) for Year 2, we start by determining the net income before taxes and then dividing by the average total assets for the year. The formula for ROTA is Net Income + Interest Expense divided by Average Total Assets. We are given that net income is $145,000 and interest expense is $30,000 for Year 2. The total assets at the end of Year 1 are $1,375,000 ($580,000 + $40,000 + $755,000), and at the end of Year 2, the total assets are $1,615,000 ($600,000 + $80,000 + $935,000).

We calculate the average total assets:

(Total Assets at the end of Year 1 + Total Assets at the end of Year 2) / 2
= ($1,375,000 + $1,615,000) / 2
= $2,990,000 / 2
= $1,495,000

Next, we calculate the adjusted net income for Year 2:

Net Income + Interest Expense
= $145,000 + $30,000
= $175,000

Now, we determine the ROTA:

(Adjusted Net Income) / (Average Total Assets)
= $175,000 / $1,495,000
= 0.117 or 11.7%

Therefore, the correct answer is option b. 11.7%%.