Calculate the return on assets and return on equity for the following companies.

Question

Calculate the return on assets and return on equity for the following companies. What appears to be the average interest rate faced by the companies? As a broad generalization, which companies appear to be effectively utilizing debt to improve financial performance?
Net Income Interest Expense* Preferred Dividends Average Assets Average Equity

Alejando Corp. $120,000 $10,000 $0 $1,100,000 $1,000,000
Ling Corp. $100,000 $80,000 $20,000 $1,900,000 $1,100,000
Beaufort Corp. $700,000 $200,000 $15,000 $4,000,000 $2,000,000
Robinson Corp. $300,000 $200,000 $100,000 $6,000,000 $4,000,000

Net Income Interest Expense* Preferred Dividends Average Assets Average Equity
Alejando Corp. $120,000 $10,000 $0 $1,100,000 $1,000,000
Ling Corp. $100,000 $80,000 $20,000 $1,900,000 $1,100,000
Beaufort Corp. $700,000 $200,000 $15,000 $4,000,000 $2,000,000
Robinson Corp. $300,000 $200,000 $100,000 $6,000,000 $4,000,000

Return on Assets Return on Equity
Alejando Corp.
Ling Corp.
Beaufort Corp.
Robinson Corp.

Explanation / Answer

COMPUTATION OF RETURN FOR THE FOLLOWING COMPANIES:

(200,000 / 4,000,000) * 100 = 5%

Average interest rate faced by companies is 10%

Interest Rate = (Average Assets - Avearge Equity ) / Interest expense

Alejando Corp = 1,100,000 - 1,000,000 / 10,000 = 10%

Ling Corp = 1,900,000 - 1,100,000 / 80,000 = 10%

Beaufort Corp = 4,000,000 - 2,000,000 / 200,000 = 10%

Robinson Corp = 6,000,000 - 4,000,000 / 200,000 = 10%

As a broad generalization, Beaufort Corp appears to be effectively utilizing debt to improve financial performance.

Its return on equity is high with an increased debt obligation.

RATIOS FORMULA ALEJANDO LING BEAUFORT ROBINSON Return on Assets (Net Income / Average assets ) * 100 (120,000 / 1,100,000) * 100 = 10.90% (100,000 / 1,900,000) * 100 =5.26% (700,000 / 4,000,000) * 100 = 17.50% (300,000 / 6,000,000) * 100 = 5% Return on equity (Net Income after preference dividend / Average equity) * 100 (120,000 / 1,000,000) * 100 = 12% (80,000 / 1,100,000) * 100 = 7.2% (685,000 / 2,000,000) * 100 = 34.25%

(200,000 / 4,000,000) * 100 = 5%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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