Chapter 10-Credit Analysis Below is information for year ended 12/31/05 for Comp

Question

Chapter 10-Credit Analysis Below is information for year ended 12/31/05 for Company A and Company B. Company A 400 400 600 Company B Interest expense Tax expense (40%) Net income Total assets- 12/31/05 Total debt Equity 400 600 10.000 10.000 5,000 5,000 0 10,000 35. Return on assets for Company A and B for 2005 are: Company A CompanyB A) B) C) D) 6% 8.4% 14% 10% 6% 1000 10% - A. Option A Option B C. Option C D. Option D 36. Financial leverage ratio for Company A and B for 2005 are: A) B) C) 1.0 2.0 0.70 0.50 1.0 1.0 0.6 1.0 A. Option A B. Option E C. Option C D. Option D

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35) Calculation of return on assets

Return on total assets= net income/ total assets*100

Company A= 600/10000*100= 6%

Company B= 600/10000*100=6%

So the option A is correct that is company A:6% company B:6%.

36) Calculation of financial leverage

Financial leverage= EBIT/EBT

Company A:

EBIT= 1000(EBT)+400(Interest)=1400         EBT=Net income+tax=600+400=1000

Financial Leverage=1400/1000=1.4 if rounded off it will become 1.

Company B:

EBIT= EBT+Interest=1000+0=1000             EBT=Net Income + tax=600+400=1000

Financial Leverage=1000/1000=1

So correct option is A company A:1 company B:1

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