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Exercise 13-11 Financial Ratios for Assessing Profitability and Managing Debt [LO13-4, LO13-5] Selected financial data from the June 30 year-end statements of Safford Company are given below: Total assets $ 5,100,000 Long-term debt (12% interest rate) $600,000 Total stockholders’ equity $ 2,800,000 Interest paid on long-term debt $72,000 Net income $400,000 Total assets at the beginning of the year were $4,900,000; total stockholders’ equity was $2,600,000. 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?

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Trinidad Tremblay
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29 Sep 2019

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

Total assets $ 5,800,000
Long-term debt (9%interest rate) $680,000
Total stockholders’equity $ 2,800,000
Interest paid onlong-term debt $61,200
Net income $450,000

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

Required:
1.

Compute the return on total assets. (Round yourpercentage answer to 1 decimal place (i.e., 0.1234 should beentered as 12.3).)


2.

Compute the return on equity. (Round your percentageanswer to 1 decimal place (i.e., 0.1234 should be entered as12.3).)


3. Is financial leverage positiveor negative?
Positive
Negative

References

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The financial statements for Castile Products, Inc., are givenbelow:

Castile Products, Inc.
Balance Sheet
December 31
Assets
Current assets:
Cash $ 19,000
Accounts receivable, net220,000
Merchandise inventory 330,000
Prepaid expenses 8,000

Total current assets 577,000
Property and equipment, net 850,000

Total assets $ 1,427,000

Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 270,000
Bonds payable, 12% 390,000

Total liabilities 660,000
Stockholders’ equity:
Common stock, $5 par value $140,000
Retained earnings 627,000

Total stockholders’ equity 767,000

Total liabilities and stockholders' equity $1,427,000

Castile Products, Inc.
Income Statement
For the Year Ended December 31
Sales $ 2,250,000
Cost of goods sold 1,170,000

Gross margin 1,080,000
Selling and administrative expenses 570,000

Net operating income 510,000
Interest expense 46,800

Net income before taxes 463,200
Income taxes (30%) 138,960

Net income $ 324,240

Account balances at the beginningof the year were: accounts receivable, $190,000; and inventory,$310,000. All sales were on account. Assets at the beginning of theyear totaled $1,050,000, and the stockholders’ equity totaled$645,000.

Required:
Compute the following:

1.

Gross margin percentage. (Round your percentage answer to 2decimal places (i.e., 0.1234 should be entered as 12.34).)


2.

Net profit margin percentage. (Round your answer to the nearestwhole percentage place (i.e., 0.1234 should be entered as12%).)


3.

Return on total assets. (Round your percentage answer to 1decimal place (i.e., 0.1234 should be entered as 12.3).)


4.

Return on equity. (Round your percentage answer to 1 decimalplace (i.e., 0.1234 should be entered as 12.3).)


5. Was financial leverage positive or negative for theyear?

Positive
Negative

The financial statements for Castile Products, Inc., are givenbelow:

Castile Products, Inc.
Balance Sheet
December 31
Assets
Current assets:
Cash $ 24,000
Accounts receivable, net 170,000
Merchandise inventory 310,000
Prepaid expenses 7,000
Total currentassets 511,000
Property andequipment, net 900,000
Total assets $ 1,411,000
Liabilitiesand Stockholders' Equity
Liabilities:
Current liabilities $ 280,000
Bonds payable, 11% 340,000
Totalliabilities 620,000
Stockholders’equity:
Common stock, $10 par value $ 170,000
Retained earnings 621,000
Total stockholders’equity 791,000
Total liabilitiesand stockholders' equity $ 1,411,000
Castile Products, Inc.
Income Statement
For the Year Ended December 31
Sales $ 2,250,000
Cost of goodssold 1,250,000
Gross margin 1,000,000
Selling andadministrative expenses 630,000
Net operatingincome 370,000
Interestexpense 37,400
Net income beforetaxes 332,600
Income taxes(30%) 99,780
Net income $ 232,820

Account balances at the beginningof the year were: accounts receivable, $220,000; and inventory,$330,000. All sales were on account. Assets at the beginning of theyear totaled $1,070,000, and the stockholders’ equity totaled$715,000.

Required:
Compute the following:
1.

Gross margin percentage. (Round your percentage answerto 2 decimal places (i.e., 0.1234 should be entered as12.34).)


2.

Net profit margin percentage. (Round your answer to thenearest whole percentage place (i.e., 0.1234 should be entered as12%).)


3.

Return on total assets. (Round your percentage answer to1 decimal place (i.e., 0.1234 should be entered as12.3).)


4.

Return on equity. (Round your percentage answer to 1decimal place (i.e., 0.1234 should be entered as12.3).)


5. Was financial leverage positiveor negative for the year?
Positive
Negative

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