Exercise 17-12 Analysis of efficiency and financial leverage Roak Company and Cl
ID: 2329644 • Letter: E
Question
Exercise 17-12 Analysis of efficiency and financial leverage Roak Company and Clay Company are similar firms that operate in the same industry. Clay began opera- tions in 2015 and Roak in 2012. In 2017, both companies pay 7% interest on their debt to creditors. The following additional information is available. A1 Clay Company 2016 1.5 5.6% 3.0% Roak Company 2017 1.7 5.9% 28% 2015 1.1 5.3% 2.9% 2017 2016 2015 2.8 9.6% 2.5% 3.0 8.8% 2.3% Total asset turnover... Return on total assets 3.1 9.0% 2 4% Sales$410,000 $380,000 $396,000 $210,000 $170,000 $110,000 Write a half-page report comparing Roak and Clay using the available information. Your analysis should include their ability to use assets efficiently to produce profits. Also comment on their success in employ- ing financial leverage in 2017Explanation / Answer
17-12)
Company Roak has been using the Assets more effectively to Company Clay as its turnover is almost three times of its total assets against around 1.5 times of Company Clay. Moreover, Roak also earning 9% on the Total Assets against Clay return of around 6% on Total assets.
Company Clay would not able to cater the Debt leverage with return of 7% as it is earning around 6% on its Assets. So, it has to pay 1% over return from the funds used to its creditors.
On the other hand, Company Roak, due to return on funds/Assets of 9% can enjoy employing Debt leverage in its capital structure. It is earning 9% against paying 7% on the debts. Thus, it is earnings 2% for the shareholders, the legal owner of the company, through use of financial leverage in capital structure.
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