Question

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

Total assets	$	5,800,000
Long-term debt (9% interest rate)	$	640,000
Total stockholders’ equity	$	2,900,000
Interest paid on long-term debt	$	57,600
Net income	$	450,000

Total assets at the beginning of the year were $5,600,000; total stockholders’ equity was $2,700,000. The company’s tax rate is 35%.

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?

Answer 1

1)	Average Assets = (beginning Assets + ending Assets)/2
	= ( $5600000+5800000)/2
	= $ 5700000
	Return On Assets = Net Income / Average Assets
	= $450000/5700000
	=7.9 %
2)	Average Stockholders Equity = (beginning Stockholders Equity + ending Stockholders Equity)/2
	= ( $2700000+2900000)/2
	= $ 2800000
	Return On Stockholders Equity = Net Income / Average Stockholders Equity
	= $450000/2800000
	=16.07 %
3)	Positive.