PROBLEM 8–1 Selected financial statement data from Texas Telecom, Inc., for Years 5 and 9 are reproduced below ($ millions):

Year 5 Year 9 Income Statement Data Revenues ........................................ $542 $979 Operating income............................ 35 68 Interest expense.............................. 7 0 Pretax income ................................. 28 68 Income taxes................................... 14 34 Net income...................................... 14 34 Balance Sheet Data Long-term operating assets............ $ 52 $ 63 Working capital............................... 123 157 Total liabilities ................................ 50 0 Total shareholders’ equity ............... 125 220 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.