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

ID: 2752342 • 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 $5,000,000; total stockholders’ equity was $2,500,000. 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:

Return on Total Assets = EBIT / Total Assets where EBIT = Net Income + Interest Expense + Taxes

Net Profit = $450,000

Interest Expense = $52,200

Tax Rate = 35%

Hence Tax Amount = 35% of Profit Before Tax

Net Profit = (100% - 35%) of Profit Before Tax

Hence Profit Before Tax = Net Profit / 65% = 450,000/0.65 = $ 692,307.69

EBIT = Net Income + Taxes + Interest Expense = Profit Before Tax + Interest Expense = 692,307.69 + 52,200 = $ 744,507.69

Hence Return on Total Assets = 744,507.69 / 5,200,000 = 14.3%

Return on Equity = Net Profit / Total Shareholder Equity

Net Profit = $450,000

Total Shareholder Equity = $2,700,000

Hence Return on Equity = 450,000 / 2,700,000 = 16.7%

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