The Balance Sheets at the End of Each of the First

question 161

Multiple Choice

The balance sheets at the end of each of the first two years of operations indicate the following:
$\text { Kellman Company }$
$\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\\\text { Total current assets } & \$ 600,000 & \$ 560,000 \\\text { Total investments } & 60,000 & 40,000 \\\text { Total property, plant, and equipment } & 900,000 & 700,000 \\\text { Total current liabilities } & 125,000 & 65,000 \\\text { Total long-term liabilities } & 350,000 & 250,000 \\\text { Preferred } 9 \% \text { stock, } \$ 100 \text { par } & 100,000 & 100,000 \\\text { Common stock, } \$ 10 \text { par } & 600,000 & 600,000 \\\text { Paid-in capital in excess of par-Common stock } & 75,000 & 75,000 \\\text { Retained earnings } & 310,000 & 210,000\end{array}$
-Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2?

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Definitions:

Portfolio Standard Deviation

A measure of the dispersion of returns from a portfolio, indicating the portfolio's risk.

Cyclical Stock

Shares of companies whose earnings and stock price are heavily influenced by the ups and downs of the economy at large.

Countercyclical Stock

A type of stock whose performance is inversely related to the overall state of the economy; it tends to perform well during economic downturns.

Expected Return

Expected Return is the anticipated amount of profit or loss an investment is likely to generate, accounting for both the risk of the investment and the time value of money.