work 6 Selected financial data from the June 30 year-end statements of Safford C

Question

work 6 Selected financial data from the June 30 year-end statements of Safford Company are given below Total assets Long-term debt (10% interest rate) Total stockholders' equity Interest paid on long-term debt 5,500,eee $ 700,ee0 $2,700,0e0 $ 70,0ee 410,000 0.5 points Net income Total assets at the beginning of the year were $5.300,000; total stockholders' equity was $2,500,000. The company's tax rate is 30%. Required 1 Compute the return on total assets. (Round your percentage answer to 1 decimal place (i.?., 0.1234 should be entered as 12.3).) 2, Compute the return on equity. (Round your percentage answer to 1 decimal place (i.e., 01234 should be entered as 12.3).) 3. Is financial leverage positive or negative? Reference 1. Return on total assets 2. Return on equity 3. Financial Leverage

Explanation / Answer

1 Return on total assets
Assuming that net income is after tax
Return on total assets                                                = Net income /average assets*100
   =410000/(5500000+5300000)/2*100
1.898148
2 Return on equity                                              = net income / shareholders funds*100
              =410000/2700000*100
              =15.18519
3 Calculation of earning before interest
Earning after tax 410000
Add: tax (EAT/(1.00-0.30))*0.30 175714.3
Earning before interest 585714.3
Add interest 70000
Earning before interest and tax 655714.3
Calculation of financila leverage EBIT/EBT
655714.3/585714.3
1.119512
yes Financial leverage is positive.

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