Question

Modern Building Supply sells various building materials toretail outlets. The company has just approached Linden State Bankrequesting a $300,000 loan to strengthen the Cash account and topay certain pressing short-term obligations. The company’sfinancial statements for the most recent two years follow:

Modern Building Supply Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	66,000	$	136,000
Marketablesecurities		0		17,000
Accounts receivable,net		467,000		298,000
Inventory		934,000		599,000
Prepaid expenses		18,000		25,000
Total currentassets		1,485,000		1,075,000
Plant and equipment,net		1,558,022		1,435,936
Total assets	$	3,043,022	$	2,510,936
Liabilitiesand Stockholders' Equity
Liabilities:
Current liabilities	$	804,000	$	432,000
Bonds payable, 8%		618,000		618,000
Totalliabilities		1,422,000		1,050,000
Stockholders'equity:
Preferred stock, $25 par,7%		275,000		275,000
Common stock, $10par		509,000		509,000
Retained earnings		837,022		676,936
Total stockholders'equity		1,621,022		1,460,936
Total liabilitiesand stockholder's equity	$	3,043,022	$	2,510,936

Modern Building Supply Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,015,000	$	4,354,000
Cost of goodssold		3,859,000		3,444,000
Gross margin		1,156,000		910,000
Selling andadministrative expenses		638,000		538,000
Net operatingincome		518,000		372,000
Interestexpense		49,440		49,440
Net income beforetaxes		468,560		322,560
Income taxes(40%)		187,424		129,024
Net income		281,136		193,536
Dividends paid:
Preferred dividends		19,250		19,250
Common dividends		101,800		76,350
Total dividendspaid		121,050		95,600
Net incomeretained		160,086		97,936
Retained earnings,beginning of year		676,936		579,000
Retained earnings,end of year	$	837,022	$	676,936

During the past year,the company has expanded the number of lines that it carries inorder to stimulate sales and increase profits. It has also movedaggressively to acquire new customers. Sales terms are 2/10, n/30.All sales are on account.

Assume that the followingratios are typical of companies in the building supplyindustry:

Current ratio	2.5
Acid-test ratio	1.2
Average collectionperiod	18	days
Average saleperiod	50	days
Debt-to-equityratio	0.75
Times interestearned ratio	6.0
Return on totalassets	10	%
Price-earningsratio	9

Assume that you havejust inherited several hundred shares of Modern Building Supplystock. Not being acquainted with the company, you decide to do someanalytical work before making a decision about whether to retain orsell the stock you have inherited.

2.	You decide next to assess the company’s rate of return. Computethe following for both this year and last year:

a.	The return on total assets. (Total assets at the beginning oflast year were $2,270,000.) (Round your intermediatecalculations to whole numbers and final answer to 1 decimalplace.)

	This year	Last year
Return on totalassets	%	%

b.	The return on common stockholders’ equity. (Stockholders’ equityat the beginning of last year was $1,259,000.)(Round yourintermediate calculations to whole numbers and final answer to 1decimal place.)

	This year	Last year
Return on commonstockholders' equity	%	%