Selected financial statement data from Texas Telecom, Inc., for Years 5 and 9 are reproduced below ($ millions):

Required:

a. Calculate return on common equity and disaggregate ROCE for Years 5 and 9 using end-of-year values for computations requiring an average (assume fixed assets and working capital are operating and a 50% tax rate).

b. Comment on Texas Telecom’s use of financial leverage.
 

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Year 5 Year 9 Income Statement Data Revenues.. $542 $979 Operating income. Interest expense. 35 68 7 Pretax income 28 68 Income taxes 14 34 Net income.. 14 34 Balance Sheet Data Long-term operating assets... $ 52 Working capital . $ 63 ..... 123 157 Total liabilities.. 50 Total shareholders' equity 125 220 Year 5 Year 9 Income Statement Data Revenues.. $542 $979 Operating income. Interest expense. 35 68 7 Pretax income 28 68 Income taxes 14 34 Net income.. 14 34 Balance Sheet Data Long-term operating assets... $ 52 Working capital . $ 63 ..... 123 157 Total liabilities.. 50 Total shareholders' equity 125 220