=+P3–20 The relationship between financial leverage and profitability Pelican Paper Inc. and Timberland Forest Inc. are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms’ financial leverage and profitability.

X MyLab Item Pelican Paper Timberland Forest Total assets $10,000,000 $10,000,000 Total equity (all common) 9,000,000 5,000,000 Total debt 1,000,000 5,000,000 Annual interest 100,000 500,000 Total sales 25,000,000 25,000,000 EBIT 6,250,000 6,250,000 Earnings available for common stockholders 3,690,000 3,450,000 Santa Enterprises Common-Size Income Statement for Year Ended December 31, 2016 Sales revenue ($7,100,000) 100.0%

Less: Cost of goods sold 58.5 Gross profits 41.5%

Less: Operating expenses Sales and marketing expenses 14.7%

Lease payments 5.5 Depreciation expense 3.4 Total operating expense 23.0%

Operating profits 18.5%

Less: Interest expense 3.0 Net profits before taxes 15.0%

Less: Taxes (rate = 30%) 3.0 Net profits after taxes 12.0%

Less: Preferred stock dividends 2.8 Retained profits 9.2%