Selected financial data from the September 30 year-end statements of Kosanka Company are given below:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $5,000,000
Long-term debt (12% interest rate) . . . . . . . $750,000
Preferred stock, $100 par, 7% . . . . . . . . . . . $800,000
Total stockholders’ equity . . . . . . . . . . . . . $3,100,000
Interest paid on long-term debt . . . . . . . . . . . $90,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $470,000
Total assets at the beginning of the year were $4,800,000; total stockholders’ equity was $2,900,000. There has been no change in preferred stock during the year. The company’s tax rate is 30%.
Required:
1. Compute the return on total assets.
2. Compute the return on common stockholders’ equity.
3. Is the company’s financial leverage positive or negative? Explain.
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $5,000,000
Long-term debt (12% interest rate) . . . . . . . $750,000
Preferred stock, $100 par, 7% . . . . . . . . . . . $800,000
Total stockholders’ equity . . . . . . . . . . . . . $3,100,000
Interest paid on long-term debt . . . . . . . . . . . $90,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $470,000
Total assets at the beginning of the year were $4,800,000; total stockholders’ equity was $2,900,000. There has been no change in preferred stock during the year. The company’s tax rate is 30%.
Required:
1. Compute the return on total assets.
2. Compute the return on common stockholders’ equity.
3. Is the company’s financial leverage positive or negative? Explain.
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