Question

# Selected financial data from the June 30 year-end statements of Safford Company are given below: Total...

Selected financial data from the June 30 year-end statements of Safford Company are given below:

 Total assets \$ 5,400,000 Long-term debt (10% interest rate) \$ 720,000 Total stockholders’ equity \$ 2,700,000 Interest paid on long-term debt \$ 72,000 Net income \$ 440,000

Total assets at the beginning of the year were \$5,200,000; total stockholders’ equity was \$2,500,000. The company’s tax rate is 30%.

Required:

1. Compute the return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 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).)

3. Is financial leverage positive or negative?

 1. Return on total assets % 2. Return on equity % 3. Financial Leverage

1. Compute the return on total assets.

Return on total assets = Net Income / (Average total assets )

Return on total assets = 440000 / (5400000 + 5200000 )/2 = 440000 / 5300000 = 8.3%

2. Compute the return on equity.

ROE = Net Income / (Average stockholders’ equity )

ROE = 440000 / (2700000 + 2500000 )/2 = 440000 / 2600000 = 16.92%

3. Is financial leverage positive or negative?

Financial Leverage = Return on Total Assets - Return on Equity

Financial Leverage = 8.3% - 16.92% = -8.62%

Financial leverage is negative

#### Earn Coins

Coins can be redeemed for fabulous gifts.