The following information pertains to Austin and Houston companies at the end of 2011.

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.

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Account Title Austin Houston Current assets $40,000 $40,000 Total assets 300,000 300,000 Current liabilities 15,000 20,000 Total liabilities 200,000 240,000 Stockholders' equity 100,000 60,000 Interest expense 14,000 17,000 Income tax expense 28,000 27,000 Net income 52,000 50,000