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

Question

5 Selected financial data from the June 30 year-end statements of Safford Company are given below: Total assets Long-term debt (9% interest rate) Total stockholders' equity Interest paid on long-term debt Net income $5,500,000 $ 650,000 $2,200,000 $ 58,500 $410,000 points Total assets at the beginning of the year were $5,300,000; total stockholders' equity was $2,000,000. The company's tax rate is 40%. Required 1. Compute the return on total assets. (Round your percentage answer to 1 decimal place (i.?., 01234 should be entered as 12.3).) 2. Compute the return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) eBook 3. Is financial leverage positive or negative? References 1. Return on total assets 2. Return on equity 3. Financial Leverage

Explanation / Answer

1.Return on Total Assets = 8.2%

= [ Net income + (Interest expense × (1 ? Tax rate))] / Average total assets

= $410,000 + [$58500 × (1 ? 0.40)] / ($5,500,000 + $5,300,000) / 2

= ($445100 / $5400000) * 100

= 8.2% (Rounded)

2.Return on Equity

Average stockholders’ equity = ($22,00,000 + $20,00,000) / 2

                                                = $21,00,000

Net Income = $4,10,000

Return on Equity = ($4,10,000 / $21,00,000) * 100

                             = 19.5% (Rounded)

3.Financial Leverage is “POSITIVE”

Financial Leverage is positive because the return on equity equity (19.5%) is greater than the return on total assets (8.2%)

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.