Financial Statements for Sarosa Company Appear Below

Question

Examlex · Accepted Answer

The Answer is a)Return on total assets = Adjusted net income*/Average total assets**
= $245/$2,485
= 9.86%
* Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $217 + 40 × (1 - 0.30)
= $217 + $28
= $245
** Average total assets = ($2,520 + $2,450)/2
= $2,485
b)Return on common shareholders' equity = (Net income - Preferred dividends)
/Average common shareholders' equity*
= [($217 - ($100 × 0.10)]/$1,625
= 12.74%
* Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2
= ($1,710 + $1,540)/2
= $1,625
c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets.
d)

a)Return on total assets = Adjusted net income*/Average total assets** = $245/$2,485 = 9.86% * Adjusted net income = Net income + [Interest expense × (1 - Tax rate)] = $217 + 40 × (1 - 0.30) = $217 + $28 = $245 ** Average total assets = ($2,520 + $2,450)/2 = $2,485 b)Return on common shareholders' equity = (Net income - Preferred dividends) /Average common shareholders' equity* = [($217 - ($100 × 0.10)]/$1,625 = 12.74% * Average common shareholders' equity = [($1,810 - $100)+ ($1,640 - $100)]/2 = ($1,710 + $1,540)/2 = $1,625 c)Financial leverage is positive because return on common shareholders' equity is greater than return on total assets. d) (ii)Allocations: Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47

(ii)Allocations:

Note:The dollar amount of return on common shareholders' equity is $207 (that is,net income of $217 less $10 dividends to preferred shareholders)is made up of $160 (assuming zero financial leverage calculated as 9.86% × $1,625)and net positive financial leverage of $47

Financial Statements for Sarosa Company Appear Below

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Financial Statements for Sarosa Company Appear Below

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