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

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 $5,200,000; total stockholders’ equity was $2,400,000. 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:

Explanation / Answer

1)

Return on total assets:

= $380,000÷[($5,400,000+$5,200,000)÷2]

= 7.2%

2)

Return on equity:

= $380,000÷[($2,600,000+$2,400,000)÷2]

= 15.2%

3)

Financial leverage is positive (10%×(1-35%)<7.2%)

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