Three companies, Company A, Company B, and Company C, are identical in every respect except for how they are financed. You are provided with the following information about each company.

Required:
a. Calculate ROA and ROE for each company for the years ended December 31, 2017 and 2018.
b. Explain the differences in performance among the three companies.
c. Explain the effect of leverage on the performance measures.
d. Which company is the best investment?Explain.

Transcribed Image Text:

Company B Jan. 1, Dec. 31, Dec. 31, Jan. 1, Dec. 31, Dec. 31, Jan. 1, Dec. 31, Dec. 31, 2017 2017 2018 2017 2017 2018 2017 2017 2018 Company A Company C Income before $22,400 2,400 interest and taxes Interest expense Income tax expense $22,400 $ 2,400 $22,400 2,400 2,400 2400 5,600 5,600 (recovery) Net income Dividends paid 4928 528 17,472 1,872 4,400 15,600 3,696 704) 13,104 2,496) 8,000 4,368 6,128 2,496 (on common stock) Total assets 3,632 80,000 89,472 86,976 80,000 89,472 86,97680,000 89,472 86,976 Shareholders' equity 80,000 89,472 86,976 56,000 65,472 62,976 24,000 33,472 30,976 22%| 22% Tax rate 22% | 22% 22% | 22%