1. Farmer Johnson’s rate of return on assets (ROA) this year was 5.5% while his rate...

1. Farmer Johnson’s rate of return on assets (ROA) this year was 5.5% while his rate of return on equity (ROE) was 7%. Given this information, what can you generalize about the average interest rate Farmer Johnson is paying on his debt relative to the rates of return above? Briefly explain your answer.

2. Can an operation be profitable but have negative net cash flow? If yes, explain how this can happen? If no, explain why it cannot happen.

Expert Solution

1. Yes, the rate of return on assets can be lower than the rate of return on equity because of the presence of the debt capital element in the overall capital structure and if the overall cost of debt is significantly lower than the rate of return which is generated on the debt capital then the cost of debt will be significantly lower and it will impact into return of equity being higher.

Farmer Johnson is having a higher return on equity than the return on assets, so it will mean that the interest payments are significantly Lower because it is providing the the return of equity with significant advantage so, the debt capital is being utilised by the company in an optimum manner and it is providing with the scope of maximization of the rate of return of the equity shareholders as when we are taking the context of the entire rate of return, which is generated on the Asset it will mean that the overall rate of return is significantly lower than the return on equity, so it is just the impact of the cost of debt which is lower than the cost of capital

2. Yes, an operation can be profitable but it can still have negative cash flows because if the operation is undertaking various type of capital expenditure plans and it is trying to purchase various kinds of assets which are related to long-term.

it can also relate to cash flows from other financing activities and investing activities along with cash flows in ascertainment with the difference between the non cash expenses and income so it will be impacting in a significant diversion of cash flows from the profitability because the cash flows will only impacting all such items which are generally related to cash payments and it will also not include anything in accrual nature

jeff jeffy answered 2 years ago

What is the current year's return on assets (ROA)?

How to find cash? and calculate total assets? ROA= NI/Total assetsCategoryPrior yearCurrent yearAccounts payable41,40045,000Accounts receivable115,200122,400Accruals16,20013,500Additional paid in capital200,000216,660Cash??????Common Stock @ par value37,60042,000COGS131,400178,190.00Depreciation expense21,60022,533.00Interest expense16,20016,634.00Inventories111,600115,200Long-term debt135,000138,345.00Net fixed assets377,719.00399,600Notes payable59,40064,800Operating expenses (excl. depr.)50,40060,541.00Retained earnings122,400136,800Sales255,600337,945.00Taxes9,90018,616.00What is the current year's return on assets (ROA)?Answer Format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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