The following information was obtained from the records of Shae, Inc.:

Merchandise inventory 264,000

Notes payable (long term) 300,000

Sales 900,000

Buildings and equipment 504,000

Selling, general, and administrative expenses 72,000

Accounts receivable 120,000

Common stock (42,000 shares) 210,000

Income tax expense 84,000

Cash 192,000

Retained earnings, 1/1/10 129,000

Accrued liabilities 18,000

Cost of goods sold 540,000

Accumulated depreciation 216,000

Interest expense 48,000

Accounts payable 90,000

Dividends declared and paid during 2010 39,000

Except as otherwise indicated, assume that all balance sheet items reflect account balances at December 31, 2010, and that all income statement items reflect activities that occurred during the year ended December 31, 2010. There were no changes in paid-in-capital during the year.


a. Prepare an income statement and statement of changes in owners’ equity for the year ended December 31, 2010, and a balance sheet at December 31, 2010, for Shae, Inc. Based on the financial statements that you have prepared for part a, answer the questions in parts b-e below. Provide brief explanations for each of your

answers and state any assumptions you believe are necessary to ensure that your answers are correct.

b. What is the company’s average income tax rate?

c. What interest rate is charged on long-term debt?

d. What is the par value per share of common stock?

e. What is the company’s dividend policy (I.e., what proportion of the company’s earnings are used for dividends)?