Problem: Stuffitt Company manufactures backpacks. During 2007 Stuffitt issued bonds at 10% interest and used the cash proceeds to purchase treasury stock. The following financial information is available for Stuffitt Company for the years 2007 and 2006.
2007 2006
Sales $9,000,000 $9,000,000
Net Income 2,340,000 2,700,000
Interest Expense 500,000 140,000
Tax expense 670,000 780,000
Dividends paid 890,000 1,026,000
Total assets (year end) 14,500,000 16,875,000
Average total assets 14,937,500 17,647,000
Total liabilities (year end) 6,000,000 3,000,000
Average total stockholders equity 9,400,000 14,100,000
A) Use the information above to calculate the following ratios for both years (1) return on assets ratio, (2) return on common stockholders equity ratio, (3) payout ratio, (4) debt to total assets ratio, (5) times interest earned ratio.
B) Referring to your findings in part (a) discuss the changes in the company’s profitability from 2006 to 2007.
C) Referring to your findings in part (a), discuss the changes in the companies’ solvency from 2006 to 2007.
D) Based on your findings in (b) was the decision to issue debt to purchase common stock a wise one?