The following information was drawn from the Year 8 balance sheets of two companies: Company Assets =

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The following information was drawn from the Year 8 balance sheets of two companies:

Company Assets = Liabilities + Common Stock  + Retained Earnings
Morris 500,000   = 125,000    +       300,000         +  75,000
Reeves 800,000  = 360,000    + 200,000               + 240,000
During Year 8, Morris’s net income was $33,750, while Reeves’s net income was $61,600.


Required
a. Compute the debt-to-assets ratio to measure the level of financial risk of both companies.
b. Compare the two ratios computed in Requirement a to identify which company has the higher level of financial risk.
c. Compute the return-on-equity ratio to measure the level of financial risk of both companies.
d. Compare the two ratios computed in Requirement a to identify which company is performing better.
e. Define the term financial leverage.
f. Identify the company that is using financial leverage to a greater extent.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Related Book For  book-img-for-question

Introductory Financial Accounting for Business

ISBN: 978-1260299441

1st edition

Authors: Thomas Edmonds, Christopher Edmonds

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