Question - Kojak Corporation decided to issue common stock and used the $300,000 proceeds to redeem all of its outstanding bonds on January 1, 2017. The following information is available for the company for 2017 and 2016.
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2017
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2016
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Net income
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$ 182,000
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$ 150,000
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Dividends declared for preferred stockholders
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8,000
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8,000
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Average common stockholders' equity
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1,000,000
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700,000
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Total assets
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1,200,000
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1,200,000
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Current liabilities
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100,000
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100,000
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Total liabilities
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200,000
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500,000
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Instructions -
(a) Compute the return on common stockholders' equity for both years.
(b) Explain how it is possible that net income increased but the return on common stockholders' equity decreased.
(c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.