3. Profitability ratios, trading on the equity . Digital Relay has both preferre

Question

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com­pany reported the following information for 20X7:

Net sales

$1,750,000

Interest expense

120,000

Income tax expense

80,000

Preferred dividends

25,000

Net income

130,000

Average assets

1,200,000

Average common stockholders' equity

500,000

Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

Does the firm have positive or negative financial leverage? Briefly ex­plain.

Net sales

$1,750,000

Interest expense

120,000

Income tax expense

80,000

Preferred dividends

25,000

Net income

130,000

Average assets

1,200,000

Average common stockholders' equity

500,000

Explanation / Answer

3. Profitability ratios, trading on the equity . Digital Relay has both preferre

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