At the end of the most current year, the Evanston Company reported the following
ID: 2463410 • Letter: A
Question
At the end of the most current year, the Evanston Company reported the following key performance indicators: Return on Assets 14.2% Financial Leverage 21.1% Which of the following statements provides a correct interpretation of the above?
A. Each dollar invested in assets generated slightly more than 21 cents of profit.
B. The company generated approximately 3 cents of profit for each dollar of equity invested by the shareholders.
C. For every dollar of sales, the company generated about 14 cents of profit.
D. None of the above.
Explanation / Answer
The correct answer is B. The company generated approximately 3 cents of profit for each dollar of equity invested by the shareholders.
Return on assets = Net income / Total assets
Financial leverage = Total assets / Equity
Return on equity = Return on assets x Financial leverage = 0.142 x 0.211 = 0.02996 or 2.996 % or 3% approx.
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