Exercise 15-11 Financial Ratios for Assessing Profitability and Managing Debt Se

Question

Exercise 15-11 Financial Ratios for Assessing Profitability and Managing Debt

Selected financial data from the June 30 year-end statements of Safford Company are given below:

     Total assets at the beginning of the year were $3,000,000; total stockholders’ equity was $2,200,000. The company’s tax rate is 30%.

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

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

3. Is financial leverage positive or negative?

Selected financial data from the June 30 year-end statements of Safford Company are given below:

Explanation / Answer

1)Return on Assets = Net Income / Average Assets Net Income 280000 Total assets-beginning 3000000 Total assets - ending 3600000 Average Assets ( beginning + ending)/2 3300000 ROA 8.48% 2) Return on equity = Net Income / shareholders equity                                          = 280000 / (2200000 + 2400000)/2                                          = 280000 / 2300000                                          = 12.17% 3) Financial leverage ratio Debt Ratio = Total liabilities / Total Assets                       = 500000/3600000                       = 500000/3600000                        = 0.14 This company is stable as the Debt ratio is low , hence the financial leveraged is negative

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