Rose Corporation reported the following income statement and balance sheet for the years ending 315 December 2016 and 31st December 2017. For all necessary ratio calculations in this question, use the period-end balance sheet numbers, assume the firm has no financial assets, and use an income tax rate of 30%. Income statement ($ thousands) 2016 2017 Revenues 2,200 3,860 -2,920 -1,700 Operating costs Administrative expenses -60 -100 Interest expense -150 -260 Income before taxes 290 580 Income taxes -87 -174 Net income 203 406 Preferred dividends -5 -5 Net income available to common 198 401 Balance sheet ($ thousands) 2016 2017 679 1000 Current assets Property, Plant & Equipment 3000 5000 Total Assets 3679 6000 Short-term debt 32 34 360 106 80 70 Accounts payable Other operating current liabilities Long-term debt Total liabilities 1400 2790 1872 3000 Preferred stock 207 500 1600 2500 1807 3000 Common stock and retained earnings Total shareholders' equity Total liabilities and shareholders' equity 3679 6000 Required: a) Calculate return on common equity (ROCE) for the 2016 and 2017 years. (2 marks) b) Showing all necessary calculations, disaggregate ROCE into operating and nonoperating components, and further disaggregate the nonoperating component into the degree of financial leverage and spread. (10 marks) c) Based on your answers to parts (a) and (b), discuss the most important factors that led to the change in ROCE from 2016 to 2017. Would you say the company has improved its performance regarding profitability over the two years? Why or why not? (5 marks) d) Discuss the limitations of profitability analysis based on ratios calculated from the income statement and balance sheet. (3 marks) Rose Corporation reported the following income statement and balance sheet for the years ending 315 December 2016 and 31st December 2017. For all necessary ratio calculations in this question, use the period-end balance sheet numbers, assume the firm has no financial assets, and use an income tax rate of 30%. Income statement ($ thousands) 2016 2017 Revenues 2,200 3,860 -2,920 -1,700 Operating costs Administrative expenses -60 -100 Interest expense -150 -260 Income before taxes 290 580 Income taxes -87 -174 Net income 203 406 Preferred dividends -5 -5 Net income available to common 198 401 Balance sheet ($ thousands) 2016 2017 679 1000 Current assets Property, Plant & Equipment 3000 5000 Total Assets 3679 6000 Short-term debt 32 34 360 106 80 70 Accounts payable Other operating current liabilities Long-term debt Total liabilities 1400 2790 1872 3000 Preferred stock 207 500 1600 2500 1807 3000 Common stock and retained earnings Total shareholders' equity Total liabilities and shareholders' equity 3679 6000 Required: a) Calculate return on common equity (ROCE) for the 2016 and 2017 years. (2 marks) b) Showing all necessary calculations, disaggregate ROCE into operating and nonoperating components, and further disaggregate the nonoperating component into the degree of financial leverage and spread. (10 marks) c) Based on your answers to parts (a) and (b), discuss the most important factors that led to the change in ROCE from 2016 to 2017. Would you say the company has improved its performance regarding profitability over the two years? Why or why not? (5 marks) d) Discuss the limitations of profitability analysis based on ratios calculated from the income statement and balance sheet
