Rose Corporation's condensed balance sheet for Year 2 is reproduced below:

Assets

(US$)

Current assets

250,000

Noncurrent assets

1,750,000

Total Assets

2,000,000

Liabilities and Equity

Current Liabilities

200,000

Noncurrent Liabilities

675,000

Common stockholders' equity

1,125,000Total Liabilities and Equity

2,000,000

Additional Information:

1. Net income for Year 2 is $157,500

2. Income tax rate is 50%

3. Accounts for total assets and shareholders' equity are the same for Years 1 and 2.

Required:

a) Determine whether leverage (from long-term debt) benefits Rose's shareholders (Hint: Examine

ROCE with and without leverage).

b) If Rose Corporation achieves a 20% return on assets, compute both its return on common equity

and its financial leverage index.

c) What can you conclude from the leverage index computed in (b)? Explain the implications for

the company's shareholders.