Operating income $ 532,150 Bond interest expense 135,000 397,150 Income taxes 183,432 Net income $ 213,718 Bonds payable $1,000,000 Common stock 875,000 Retained earnings 375,000 Instructions (a) Compute the return on common stockholders' equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.) Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity =213,718 ÷ (875,000 + 375,000) = .17 or 17% Rate of Interest Paid on Bonds = Bond Interest Expense ÷ Bonds Payable = 135,000 ÷ 1,000,000 = 13.5% (b) Is Emporia Plastics, Inc. trading on the equity successfully? Explain. The return on common Stockholder’s equity is greater than the rate of interest paid on bonds. The firm is trading on the equity successfully. 7
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- Spring '15