Question

CH 13 ex #9 Selected financial data from the June 30 year-end statements of Safford Company are given below:

Total assets	$	5,600,000
Long-term debt (12% interest rate)		$590,000
Total stockholders’ equity	$	3,000,000
Interest paid on long-term debt		$70,800
Net income		$390,000

Total assets at the beginning of the year were $5,400,000; total stockholders’ equity was $2,800,000. The company’s tax rate is 35%.

Required:

a.	Compute the return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

      

b.	Compute the return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

c.	Is financial leverage positive or negative?
	Positive Negative

Answer 1

(1)Return on total assets

Return on total assets    = [ Net Income / Average total assets ] x 100

                                      = [ $390,000 / {($56,00,000 + 54,00,000)} / ] x 100

                                      = [ $390,000 / 55,00,000 ] x 100

                                      = 7.1%

(2) Return on equity

Return on equity            = [ Net Income / Average total stockholders equity ] x 100

                                      = [ $390,000 / {($30,00,000 + 28,00,000} / ] x 100

                                      = [ $390,000 / 29,00,000 ] x 100

                                      = 13.4%

(3) Is financial leverage positive or negative?

Financial leverage is positive for the Safford Company