Windmere Corporation s statement of financial position at

December 31 2010 #3825

Windmere Corporation’s statement of financial position at December 31, 2010, appears as
follows:Cash………………………………………… $ 63,000Other current assets………………………… 1,1
assets (net) …………………………. 7,140,000Total…………………………………………. $8,309,000Curr
liabilities…………………………….. $ 546,000Long-term debt……………………………… 1,400,000Prefer
shares……………………………… 700,000Share capital—common shares……………… 2,100,000Retain
earnings…………………………… 3,563,000Total…………………………………………. $8,309,000For the
Windmere reported net earnings of $540,000. During the year, the company declared preferred
dividends of $50,000 and common dividends of $300,000.Required:a. Calculate the following
ratios for Windmere:i. Return on assets, using net income in the calculationii. Return on
common shareholders’ equityb. Assume that the company issued $1.4 million of common
shares at the beginning of last year and paid off the long-term debt, and that the company’s
interest expense related to its long-term debt for last year was $70,000, after taxes.i. What
would the return on common shareholders’ equity be? ii. Would shareholders be better or
worse off?iii. Does switching from debt to equity financing always have this effect on the return
on common shareholders’ equity? Explain.c. Assume that the long-term debt remains as shown
on the balance sheet and that the company issued an additional $700,000 of common shares
last year and used the proceeds to redeem and cancel the preferred shares. i. What would the
return on common shareholders’ equity be?ii. Would shareholders be better or worse off?iii.
Does switching from preferred equity financing to common equity financing always have this
effect on the return on common shareholders’ equity? Explain.View Solution:
Windmere Corporation s statement of financial position at December 31 2010

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