Willingham Company manufactures raingear. During 2010 Willingham 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 Willingham Company.
|
2010 |
2009 |
|
|
Sales |
$3,000,000 |
$3,000,000 |
|
Net income |
780,000 |
850,000 |
|
Interest expense |
120,000 |
50,000 |
|
Tax expense |
166,000 |
200,000 |
|
Total assets |
5,000,000 |
5,625,000 |
|
Average total assets |
5,312,500 |
6,250,000 |
|
Total liabilities |
2,000,000 |
1,200,000 |
|
Average total stockholders’ equity |
3,312,500 |
5,250,000 |
|
Dividends |
270,000 |
300,000 |
Instructions
(a) Use the information above to calculate the following ratios for both years: (i) return on assets ratio, (ii) return on common stockholders’ equity ratio, (iii) payout ratio, (iv) debt to total assets ratio, (v) times interest earned ratio.
(b) Referring to your findings in part (a), discuss the changes in the company’s profitability from 2009 to 2010.
(c) Referring to your findings in part (a), discuss the changes in the company’s solvency from 2009 to 2010.
(d) Based on your findings in (b), was the decision to issue debt to purchase common stock a wise one?