The following information pertains to Tacoma and Olympia companies at the end of 2016: Required a. Compute
Question:
The following information pertains to Tacoma and Olympia companies at the end of 2016:
Required
a. Compute each company€™s debt to assets ratio, current ratio, and times interest earned (EBIT must be computed). Identify the company with the greater financial risk.
b. Compute each company€™s return on equity ratio and return on assets ratio. Use EBIT instead of net income when computing the return on assets ratio. Identify the company that is managing its assets more effectively. Identify the company that is producing the higher return from the stockholders€™ perspective. Explain how one company was able to produce a higher return on equity than the other.
Account Title Tacoma Co Olympia Co Current assets Total assets Current liabilities Total liabilities Stockholders' equity Interest expense Income tax expense Net income $ 60,000 1,000,000 55,000 800,000 200,000 60,000 95,000 145,000 60,000 1,000,000 50,000 600,000 400,000 45,000 100,000 155,000
Step by Step Answer:
a First compute EBIT for each company Tacoma Olympia Net Income 145000 155000 Interest Expense 60000 ...View the full answer
Fundamental Financial Accounting Concepts
ISBN: 978-0078025907
9th edition
Authors: Thomas Edmonds, Christopher Edmonds
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The Dupont analysis is an expanded return on equity formula, calculated by multiplying the net profit margin by the asset turnover by the equity multiplier. The DuPont analysis is also known as the DuPont identity or DuPont model.This Video will guide on how to calculate return on Equity and estimate profitability of shareholders using DuPont Analysis.
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