Help Save& ExitSubmit Homework #120 Exercise 15-11 Financial Ratios for Assessin
ID: 2437950 • Letter: H
Question
Help Save& ExitSubmit Homework #120 Exercise 15-11 Financial Ratios for Assessing Profitablity and Managing Debt L015-4, LO15-5) 5 Selected financial data trom the June 30 year-end statements of Safford Company are given below: Total assets at the beginning of the year were $5,500.000, sotal stockholders' equity was $2,800,000 The company's tax rate is the return on total assets (Round your percentage answer to 1 declmal place .e, 0.1234 should be entered as 12.3)) 2. Compute the return on equity (Round your percentage answer to 1 declmal place (e, 01234 should be entered as 12.3)J 3. Is financial leverage positive or negative?Explanation / Answer
Solution 1:
Return on total assets = EBIT / Average Total Assets
Average total assets = ($5,700,000 + $5,500,000) /2 = $5,600,000
EBIT = $410,000 + $62,000 = $472,000
Return on total assets = $472,000 / $5,600,000 = 8.4%
Solution 2:
Return on equity = Net Income / Average stockholders equity
Average stockholder equity = ($2,800,000 + $3,000,000)/2 = $2,900,000
Return on equity = $410,000 / $2,900,000 = 14.1%
Solution 3:
As return on total assets is lesser than interest rate on long term debt, therefore financial leverage is negative.
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