Profitability Analysis Exercises and problems
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Option #1: Profitability Analysis Exercises and Problems
Do the assigned problems using Summer Peebles, Inc.’s condensed 2014 financial data below:
|
Assets |
|
|
Current Assets |
$250,000.00 |
|
Noncurrent Assets |
$1,750,000.00 |
|
Total Assets |
$2,000,000.00 |
|
Liabilities and Equity |
|
|
Current Liabilities |
$200,000.00 |
|
Noncurrent Liabilities (8% Bonds) |
$675,000.00 |
|
Common Stockholders’ Equity |
$1,125,000.00 |
|
Total Liabilities and Equity |
$2,000,000.00 |
Additional Information:
- Net income for 2014 is $157,500.
- Income tax rate is 50%.
- Amounts for total assets and shareholders’ equity are the same for 2013 and 2014.
- All assets and current liabilities are considered to be operating.
Required:
- Determine whether leverage (from long-term debt) benefits Rose’s shareholders. (Hint: Examine ROCE with and without leverage.)
- Compute the NOPAT and RNOA (use ending NOA).
- Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part (B).
Your submission should:
- Be 1-2 pages for the written portion.
- Include the Excel spreadsheet with computations.
- Clearly separate your responses so your instructor knows the problems you are answering.
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