Reference no: EM132461716 , Length: 2

Profitability Analysis Exercises and Problems

Problem 1: Do the assigned problems using Summer Peebles, Inc.'s condensed 2014 financial data below:

Assets

Current Assets              $250,000.00

Noncurrent Assets         $1,750,000.00

Total Assets                 $2,000,000.00

Liabilities and Equity

Current Liabilities                               $200,000.00

Noncurrent Liabilities (8% Bonds)          $675,000.00

Common Stockholders' Equity              $1,125,000.00

Total Liabilities and Equity                   $2,000,000.00

Additional Information:

1. Net income for 2014 is $157,500.
2. Income tax rate is 50%.
3. Amounts for total assets and shareholders' equity are the same for 2013 and 2014.
4. All assets and current liabilities are considered to be operating.

Required:

Question 1: Determine whether leverage (from long-term debt) benefits Rose's shareholders. (Hint: Examine ROCE with and without leverage.)

Question 2: Compute the NOPAT and RNOA (use ending NOA).

Question 3: Demonstrate the favorable effect of leverage given the disaggregation of ROCE