Selected Financial Ratios for Common Stockholders [LO2]

Selected financial data from the September 30 year-end statements of Kosanka Company are given below:

Total assets . . . . . . . . . . . . . . . . . . . . . . $5,000,000 Long-term debt (12% interest rate) . . . . . $750,000 Preferred stock, $100 par, 7% . . . . . . . . $800,000 Total stockholders’ equity . . . . . . . . . . . . $3,100,000 Interest paid on long-term debt . . . . . . . $90,000 Net income . . . . . . . . . . . . . . . . . . . . . . . $470,000 Total assets at the beginning of the year were $4,800,000; total stockholders’ equity was

$2,900,000. There has been no change in preferred stock during the year. The company’s tax rate is 30%.

Required:

1. Compute t he r eturn on t otal a ssets.

2. Compute the return on common stockholders’ equity.

3. Is the company’s financial leverage positive or negative? Explain.