JCPenney operates a chain of retail department stores, selling apparel, shoes, jewelry, and home furnishings. It also offers most of its products through catalog distribution. During fiscal Year 5, it sold Eckerd Drugs, a chain of retail drugstores, and used the cash proceeds, in part, to repurchase shares of its common stock. Exhibit 4.26 presents selected data for JCPenney for fiscal Year 3, Year 4, and Year 5.

For year ended January 31

	year 5	year 4	year 3
sales	$18,424	$17,786	$17,633
net income (loss)	524	(928)	405
Interest expense	279	271	245
preferred stock dividend	12	25	27
income tax rate	35%	35%	35%
January 31:	year 5	year 4	year 3	year 2
total assets	$14,127	$18,300	$17,787	$18,048
preferred stock	0	304	333	363
Total common shareholders equity	4,856	5,121	6,037	5,766

a. Calculate the rate of ROA for fiscal Year 3, Year 4, and Year 5. Disaggregate ROA into the profit margin for ROA and total assets turnover components. The income tax rate is 35%.

b. Calculate the rate of ROCE for fiscal Year 3, Year 4, and Year 5. Disaggregate ROCE into the profit margin for ROCE, assets turnover, and capital structure leverage components.

c. Suggest reasons for the changes in ROCE over the three years.

d. Compute the ratio of ROCE to ROA for each year.

e. Calculate the amount of net income available to common stockholders derived from the use of financial leverage with respect to creditors capital, the amount derived from the use of preferred shareholders capital, and the amount derived from common shareholders capital for each year.

f. Did financial leverage work to the advantage of the common shareholders in each of the three years? Explain.