Selected financial data from the June 30 year-end statements of Safford Company

ID: 2494035 • Letter: S

Question

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 $5,100,000; total stockholders’ equity was $2,100,000. The company’s tax rate is 35%.

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

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

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

1) Net Income (as per Financial Statements) = 370000$ (assumed that Interest paid on long term debt expense has not be recognised)

Total Assets at the year end = 5300000

Return on total Assets = 370000/5300000

= 6.98%

2) Net Income (as per Financial Statements) = 370000

Less : After Tax Interest on Debts = 34515

Income Available for Equity Shareholders= 335485

Total Equity = 2300000

Return on equity = 335485/2300000

= 14.59%

3) Cost of equity is much more than the cost of debt (9%). So financial leverage is positive as per the balanced Capital Structure is concerned.

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