The following information was drawn from the Year 8 balance sheets of two companies:

Company Assets = Liabilities + Common Stock  + Retained Earnings
Morris 500,000   = 125,000    +       300,000         +  75,000
Reeves 800,000  = 360,000    + 200,000               + 240,000
During Year 8, Morris’s net income was $33,750, while Reeves’s net income was $61,600.

Required
a. Compute the debt-to-assets ratio to measure the level of financial risk of both companies.
b. Compare the two ratios computed in Requirement a to identify which company has the higher level of financial risk.
c. Compute the return-on-equity ratio to measure the level of financial risk of both companies.
d. Compare the two ratios computed in Requirement a to identify which company is performing better.
e. Define the term financial leverage.
f. Identify the company that is using financial leverage to a greater extent.