Selected financial data from the June 30 yearend statements of Safford Company are given below:
Total assets  $  5,400,000  
Longterm debt (10% interest rate)  $  720,000  
Total stockholders’ equity  $  2,700,000  
Interest paid on longterm 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. 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
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